Fin 28513 | Course Paper

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A tenant who expects her business to grow may wish to have a clause included in her

lease that grants her the choice to lease adjacent space as soon as it becomes available.

This lease option is more commonly referred to as a:

A. relocation option

B. right of first refusal

C. renewal option

D. consideration

There are a set of restrictive conditions that REITs must satisfy on an ongoing basis in

order to maintain their special tax status. All of the following statements regarding the

main restrictions are true EXCEPT:

A. At least 100 investors must own a REIT’s shares

B. No five investors can own more than 50 percent of a REIT’s shares

C. At least 75 percent of the value of a REIT’s assets must consist of real estate assets

D. A REIT must distribute at least 75% of its taxable income to shareholders in the form

of dividends.

Suppose you have found a tenant who wishes to rent out your vacation home for the

next twelve months. You are charging $800 per month in rent. You will collect the first

rent payment today and then on the 1st of the month each month thereafter. What is the

value of this investment opportunity to you today if you could reinvest your income at

an annual rate of 3% with interest compounded on a monthly basis?

A. $7,963.20

B. $8,202.10

C. $9,445.80

D. $9,469.42

Despite the risks that are inherent in the mortgage lending process, mortgage bankers

have various tools at their disposal to hedge risk exposure. For example, since mortgage

bankers know that only part of the loan commitments that they issue will be taken down

by borrowers, they can purchase the right to sell a certain dollar amount of a certain

loan type in the secondary market through what is commonly referred to as a:

A. Standby forward commitment

B. Mortgage pipeline

C. Conduit

D. Collateral

The tax treatment of up-front financing costs calls for these expenses to be amortized

over the life of the loan. However, if the loan is prepaid prior to the term of the loan

(perhaps because the property is sold), the tax treatment of these costs changes. If

up-front financing costs on a 30-year loan total $6,000, and the loan is prepaid in full at

the end of year 5, what is

the maximum amount that the investor can deduct when calculating taxable income

from rental operations in year 5?

A. $5,000

B. $5,200

C. $5,600

D. $6,000

When cash flows are classified as passive activity income, investors are subject to

passive

activity loss restrictions. These restrictions imply that passive income losses:

A. can be used to offset positive taxable income from other passive activities.

B. can be used to offset positive taxable income from other passive and active activities.

C. can be used to offset positive taxable income from other passive and portfolio

activities.

D. cannot be used to offset positive taxable income from any type of activity.

Homeowners receive preferential tax treatment under current federal income tax laws.

The benefits that homeowners receive from this treatment include all of the following

EXCEPT:

A. Appreciation in the value of the home that has occurred since the time of purchase is

excluded from federal taxable income

B. Homeowners can deduct their mortgage interest expenses on both first (primary) and

second homes from federal taxable income

C. Homeowners can deduct local property taxes from federal taxable income

D. Losses on the sale of a personal residence can be deducted from federal taxable

income

Single year return measures and ratios can be categorized into three groups:

profitability ratios, multipliers, and financial ratios. All of the following are considered

financial ratios EXCEPT:

A. Capitalization ratio

B. Operating Expense ratio

C. Loan-to-value ratio

D. Debt yield ratio

Most appraisers adhere to an “above-line” treatment of capital expenditures. This

implies which of the following?

A. Capital expenditures are subtracted in the calculation of net operating income.

B. Capital expenditures are subtracted from net operating income to obtain a net cash

flow measure.

C. Capital expenditures are added to net operating income.

D. Capital expenditures are excluded from all calculations because they are difficult to

estimate.

Ownership forms for pooled equity investment can differ in terms of how the entity’s

cash flows are distributed to its investors. Which of the following ownership structures

requires cash flows to be allocated to each shareholder in proportion to his or her

ownership of the entity, thereby preventing special allocations to multiple classes of

investors?

A. Subchapter S Corporation

B. General Partnership

C. Limited Partnership

D. Limited Liability Company

Given the following information, calculate the total amount of annual operating

expenses for this income-producing property. Lawn care: $10,000, Property taxes:

$24,000, Maintenance: $35,000, Janitorial: $25,000, Security: $32,000, Debt service:

$145,000.

A. $102,000

B. $126,000

C. $247,000

D. $271,000

Unlike other forms of evidence of title, title insurance guards the grantee against certain

risks. However, there are a number of important limits to title insurance. Which of the

following is an example of the limits to title insurance?

A. It does not protect the grantee from the threat of physical damage to the property.

B. It does not protect a grantee against the legal costs of defending the title

C. It does not protect a grantee against loss of the property in case of an unsuccessful

title defense.

D. It does not protect against legal attack on the owner’s title arising from a claim that

diminishes the owner’s rights of use.

Property rights can be divided into two classes, real and personal. Which of the

following is an example of real property?

A. Vehicles

B. Stocks and bonds

C. Patents

D. Commercial building

Investors in real estate can choose to hold properties directly in the private market or

indirectly through publicly traded real estate securities. The market for buying selling,

and leasing real estate can be characterized by all of the following EXCEPT:

A. localized markets

B. highly segmented markets

C. privately negotiated contracts

D. low transaction costs

When leasing nonresidential properties, owners would prefer to rent exclusively to high

quality tenants. Such owners will tend to seek out companies whose general debt

obligations are rated “investment grade” by one of more of the U.S. rating agencies.

These potential tenants are more commonly referred to as:

A. tenant reps

B. credit tenants

C. tenant mix

D. in-house leasing agents

The lease is a contract between the owner and the tenant that transfers exclusive use and

possession of the space to the tenant in return for rent or other consideration. In this

arrangement, the owner is referred to as the:

A. lessor

B. lessee

C. agent

D. benchmark

Given the following information regarding an income producing property, determine

the after tax internal rate of return (IRR). Expected Holding Period: 5 years; 1st year

Expected BTCF: $30,656; 2nd year Expected BTCF: $33,329; 3rd year Expected BTCF:

$36,082; 4th year Expected BTCF: $38,918; 5th year Expected BTCF: $41,839; 1st year

Expected Tax Liability: $7,645; 2nd year Expected Tax Liability: $8,658; 3rd year

Expected Tax Liability: $9,708; 4th year Expected Tax Liability: $10,798; 5th year

Expected Tax Liability: $6,951; Estimated Before Tax Equity Reversion at end of year

5: $343,674; Expected Taxes Due on Sale at end of year 5: $32,032; Required equity

investment: $241,163

A. 11.2%

B. 13.3%

C. 15.4%

D. 20.3%

Considered the most common type of home loan, which of the following refers to any

standard home loan that is not insured or guaranteed by an agency of the U.S.

government?

A. Conventional home loan

B. Federal Housing Administration loan

C. Veterans Affairs loan

D. Section 203 loan

Given the following information, calculate the capitalization rate for the following

apartment complex. Number of apartments: 15; Market Rent (per month): $1,000;

Vacancy and Collection Loss: 10% of potential gross income; Operating Expenses: 5%

of effective gross income; Capital Expenditures: 10% of effective gross income;

Acquisition Price: $1,710,000.

A. 8.1%

B. 9.0%

C. 9.5%

D. 10.5%

Given the following information, calculate the debt yield ratio on the following

commercial property. Estimated Net Operating Income in the first year: $250,000, Loan

amount: $2,047,500, Purchase price: $2,730,000

A. 4.8%

B. 12.2%

C. 68.6 %

D. 75.2 %

Consistently the investment target of pension funds, publicly traded real estate

companies, and real estate funds, large commercial properties valued well over $10

million are often referred to as:

A. segmented property

B. investment-grade property

C. speculative-grade property

D. immobile property

The syndication agreement generally creates a principal/agent relationship in which the

syndicator (agent) is empowered to act on behalf of the investors (principals). In most

principal/agent relationships, there is the concern that the agent will act in the agent’s

best interest, not in the best interests of the principal. This issue is more commonly

referred to as:

A. adverse selection

B. moral hazard

C. dual agency

D. signaling

In certain circumstances, mutual assent between the contracting parties may be broken,

thus invalidating the contract. Which of the following defects to mutual assent involves

compelling a person to act by the use of force?

A. One of the parties is under duress.

B. One of the parties is under undue influence.

C. One of the parties is under menace.

D. One of the parties is committing fraud.

Which of the following terms refers to a written agreement that binds the lender to

make a loan to the borrower provided the borrower satisfies the terms and conditions of

the agreement?

A. Loan application

B. Loan commitment

C. Loan underwriting

D. Loan document

Many older, retired households are considered “house poor.” Which of the following

forms of loans has been designed to help mitigate this problem by offering additional

monthly income to these homeowners in exchange for a portion of their housing equity?

A. Purchase-money mortgage (PMM)

B. Piggyback Mortgage

C. Home equity loan

D. Reverse mortgage

When land use controls impose exceptional hardship and loss of value, a relief

mechanism must be provided. This relief is referred to as a:

A. building code

B. zoning ordinance

C. comprehensive plan

D. variance

In considering a 3/1 adjustable-rate mortgage (ARM), the interest rate will be fixed for

how many years?

A. One year

B. Two years

C. Three years

D. Four years

Suppose that we observe two comparable properties that have each sold twice within

the past two years. Property A sold 24 months ago for $350,000 and Property B sold 18

months ago for $325,000. If the two properties were sold today at $375,000 and

$340,000, respectively, estimate the change in market conditions (percentage change in

price) per month, assuming we equally weight the two properties in our analysis?

A. 0.19%

B. 0.24%

C. 0.28%

D. 0.33%

Based on your understanding of the relation between risk and the phases of an income

producing property’s life, which phase would you expect to entail the highest risk?

A. Development and construction phase

B. Lease-up stage

C. Stable operation phase

D. All three stages of a property’s life have similar and equal risk

Given the following information regarding an income producing property, determine

the NPV using levered cash flows in your analysis. Required equity investment:

$270,000; Expected NOI for each of the next five years: $150,000; Debt Service for

each of the next five years: $125,000; Expected Holding Period: 5 years; Required yield

on levered cash flows: 15%; Expected Sale Price at end of Year 5: $2,000,000;

Expected Cost of Sale: $125,000; Expected Mortgage Balance at time of sale:

$1,500,000

A. $245.15

B. $270,245.15

C. $419,264.54

D. $1,435,029.64