Fin 58155 | Course Paper

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Operating expenses can be divided into two categories: variable and fixed expenses.

Which of the following best exemplifies a fixed expense?

A.Utilities

B.Property management

C.Property taxes

D.Trash removal

Real estate taxes represent the largest single source of revenue for a large portion of

local governments. Most property taxes are applied in relation to the value of the

property, or in other words, they are:

A.effective tax rates

B.ad valorem taxes

C.tax-exempt

D.regressive

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.Competent parties

B.Consideration

C.Offer and acceptance

D.Written form

While a variety of loan terms are available in a lender’s mortgage menu, the most

common loan term on a level-payment mortgage is:

A.7 years

B.15 years

C.30 years

D.40 years

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

mortgages?

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)

For purposes of federal income taxes, real property is classified into four categories.

With which of the following types of real estate is the investor able to reduce his

taxable income to reflect the wear and tear of a property over time?

A.Personal residence

B.Dealer property

C.Trade or business property

D.Investment property

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.

Some tenants who are subject to long-term leases may desire to transfer all of their

tenant rights and obligations to another party. This is commonly referred to as a(n):

A.assignment

B.sublease

C.concession

D.lease option

The direct ownership of commercial real estate produces cash flows from rental

operations and, perhaps, cash flow from eventual sale of the property. Since financial

leverage and tax considerations play an important part in determining an investor’s

returns, the measure of investment value most relevant to investors is the present value

of:

A.before-tax cash flows (BTCF)

B.after-tax cash flows (ATCF)

C.net operating income (NOI)

D.net sale proceeds (NSP)

The internal rate of return (IRR) and the net present value (NPV) are tools that are

widely used in real estate investment and finance decision making. An investor would

most likely pursue an investment if which of the following circumstances was true?

A.The going-in IRR exceeds the investor’s required rate of return.

B.The going-in IRR is less than the investor’s required rate of return.

C.The NPV is negative.

D.The NPV is equal to zero.

Given the following information on an interest-only mortgage, calculate the monthly

mortgage payment. Loan amount: $56,000, Term: 15 years, Interest Rate: 7.5%.

A.$169.13

B.$350

C.$519.13

D.$4,200

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

return.

Loan servicing includes a number of responsibilities such as collecting monthly

mortgage payments from the borrower, remitting principal and interest payments to

investors, ensuring sufficient escrow payments are being made by the borrower, and

managing default if it should arise. In exchange for these services, mortgage bankers

receive a fee. If the outstanding loan balance is $250,000 and the annual servicing fee is

0.35%, what is the monthly fee for servicing the loan?

A.$7.29

B.$72.92

C.$729.16

D.$7291.67

Relative to residential loans, the underwriting process for commercial loans is more

complicated. The commercial loan underwriting process focuses first on which of the

following?

A.Individual borrower’s credit quality

B.Income producing potential of the collateral property

C.Individual borrower’s wages

D.Individual borrower’s personal assets

As of 2008, nearly 88% of private commercial real estate equity was owned by

“noninstitutional investors.” Which of the following investor categories represents the

most common form of noninstitutional ownership?

A.Pension funds

B.Sole proprietorship

C.Syndicate

D.Life insurance companies

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

In determining a property’s before-tax cash flow from operations (BTCF) and net

operating income (NOI), it is important to understand how each accounts for the use of

financial leverage in its calculation. Which of the following statements is true in regards

to how these two measures account for the use of financial leverage?

A.BTCF and NOI are both levered cash flows

B.BTCF is an unlevered cash flow, while NOI is a levered cash flow

C.BTCF is a levered cash flow, while NOI is an unlevered cash flow

D.BTCF and NOI are both unlevered cash flows

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

Net present value (NPV) is interpreted using the following decision rule: The investor

will purchase the property as long as the NPV is:

A.greater than zero

B.equal to zero

C.less than zero

D.equal to the opportunity cost of investment

When a borrower defaults on the payment requirements of a loan, there are several

options that the lender has at its disposal. When the lender allows the borrower simply

to convey the property to the lender, this is commonly referred to as:

A.Bankruptcy

B.Foreclosure

C.Deed in lieu of foreclosure

D.Equity right of redemption

The Federal National Mortgage Association (Fannie Mae) was originally established to

provide a secondary market for FHA-insured and VA-guaranteed loans. All of the

following statements regarding Fannie Mae are true EXCEPT:

A.Fannie Mae lends money directly to homebuyers.

B.Fannie Mae is a private, self-supporting company with publicly traded stock.

C.Fannie Mae fully guarantees timely payment of interest and principal to investors.

D.Fannie Mae buys both conventional home loans and government-underwritten

residential mortgages.

The management agreement provides for a management fee that is usually in the range

of 3 to 6% of which of the following measures of property income?

A.Potential gross income

B.Effective gross income

C.Net operating income

D.Income tax liability

Recently, mortgage banking has become the natural method for doing mortgage

lending. Within the mortgage lending process, which of the following roles serves as

the primary revenue source for mortgage banks?

A.Loan commitment

B.Loan funding

C.Loan servicing

D.Loan sales

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

Since many commercial properties are held by limited liability corporations or limited

partnerships, it is important to understand the tax consequences at the individual

investor level. Individuals face different tax rates depending on the level of their taxable

income. As of 2009, an individual making between $82,250 and $171,550 would fall

into which of the following tax brackets?

A.15%

B.25%

C.28%

D.35%

For the purposes of estimating the effective borrowing cost (EBC), only those up-front

expenses associated with obtaining the mortgage should be included. With this in mind,

which of the following costs should not be included in one’s calculation of EBC?

A.Discount points

B.Loan origination fees

C.Appraisal fee

D.Buyer’s title insurance

In an analogy to the stock market, the net operating income of a property can be viewed

as which of the following?

A.Annual dividend expected to be produced by the property

B.Annual return on the value of the property

C.Market value of the property

D.Price-earnings ratio of the property

In the state of Florida, for example, homeowners may qualify for a tax exemption in

which up to $50,000 will be deducted from the assessed value of the property before

taxes are calculated as long as the property owner occupies a home as the family’s

principal residence and has claimed residency within the state. This exemption is better

known as the:

A.ad valorem exemption

B.affordable housing exemption

C.growth moratorium

D.homestead exemption

Commercial real estate returns are determined in no small part by how well the ongoing

management function is performed. Management decisions can be classified into two

categories: property management and asset management. Which of the following

functions would be considered a primary responsibility of an asset manager?

A.Property acquisitions and dispositions

B.Marketing a property to prospective tenants

C.Maintaining the condition of the property

D.Signing leases

While net present value (NPV) and internal rate of return (IRR) analysis both may be

used as investment decision criteria, there are some limitations to the IRR method that

make its use as an investment criterion problematic in certain situations. All of the

following are limitations of the IRR method EXCEPT:

A.IRR calculations assume that cash flows are reinvested at the IRR, rather than at the

actual rate that investors expected to earn on reinvested cash flows.

B.With the IRR decision criterion multiple solutions may exist for investments where

the sign of the cash flows changes more than once over the expected holding period.

C.The IRR methodology cannot be used to make comparisons across different

investment opportunities.

D.The use of IRR as a decision criterion will not necessarily result in wealth

maximization for the investor.

In accordance with RESPA, whenever a buyer obtains a new first mortgage loan from a

chartered or insured lender, when the loan is insured by the FHA or guaranteed by the

VA, or when the loan will be sold to one of the federally related secondary mortgage

market agencies, a good-faith estimate of the settlement costs must be provided by the

lender within:

A.3 business days

B.5 business days

C.30 calendar days

D.90 calendar days

While college-level courses are not widely available, a number of professional and

trade organizations exist in the field of property management. Which of the following

certifications awarded by the Institute of Real Estate Management is aimed at

individuals who manage larger, residential, office, industrial, or retail properties?

A.Certified Property Manager (CPM)

B.Accredited Resident Manager (ARM)

C.Real Property Administrator (RPA)

D.Member of Appraisal Institute (MAI)

Since banks seldom loan 100 percent of construction costs, developers often turn to

mezzanine financing to obtain necessary funds. With mezzanine debt, which of the

following entities is typically pledged as collateral to the lender?

A.Land

B.Ownership shares in the development entity

C.Personal assets of the developer

D.Construction materials

Which of the following types of institutions has historically been the largest purchaser

of residential mortgages?

A.Commercial banks

B.Savings and Loans

C.Government sponsored enterprise

D.Mortgage banking companies