FIN 58996 | Course Paper

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A client has requested advice on a potential investment opportunity involving an

income producing property. She would like you to determine the internal rate of return

of the

investment opportunity based on the following information. Expected Holding Period: 5

years; End of first year NOI estimate: $113,900; NOI estimates in subsequent years will

grow by 5% per year; Price at which the property is expected to be sold at the end of

year 5: $1,615,205.22; Current market price of the property: $1,475,667.71.

A. -15.30%

B. 8.60%

C. 9.86%

D. 10.00%

You have just had a tenant sign a lease contract that guarantees you payments of

$100,000 at the end of each year for the next five years. If you wish to determine the

present value of these future cash flows (i.e. the value of this cash flow stream to you

today), you would use which of the following time value of money processes?

A. Compounding

B. Discounting

C. Amortizing

D. Aggregating

Consider the following excerpt from a sample deed: “The Seller is lawfully seized in

fee simple of the above described property, less and except a prior reservation of all oil,

gas and mineral rights in the property conveyed.” The underlined portion of the

preceding statement represents which of the following basic requirements of a deed?

A. Habendum clause

B. Recital of consideration

C. Covenant against encumbrances

D. Exceptions and reservations clause

Since property taxes are paid in arrears, the buyer will be responsible for paying them

after closing. Suppose that the closing date on the home for sale is February 28th of a

leap year (e.g., 2012, 2016, etc). How many calendar days would the seller be

responsible for when calculating his/her share of the property tax owed for the year in

which the home was sold.

A. 58 days

B. 59 days

C. 307 days

D. 308 days

If all appraisal methods are appropriate for use in valuing a particular property, there is

a clear order of preference that real estate professionals adhere to. Which of the

following depicts the preferred order, with the most preferable approach being listed

first and the least preferable listed last?

A. Sales comparison approach, cost approach, income approach

B. Income approach, Sales comparison approach, cost approach

C. Cost approach, income approach, sales comparison approach

D. Sales comparison approach, income approach, cost approach

Suppose you have just purchased your first home for $300,000. At the time of purchase

you could only afford to commit to a down-payment of $15,000. In order to make the

loan, the lender requires you to obtain private mortgage insurance (PMI) on their

behalf. Suppose over time you paid down the principal of the loan to $280,000 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 $228,000, what

would the lender’s loss of principal be taking into consideration the protection of

mortgage insurance? (Let’s assume that the PMI in this case covers the top 30% of the

loan)

A. $0

B. $52,000

C. $57,000

D. $72,000

Since the issues in many transactions are similar, brokers often use standard preprinted

contract forms. Generally, the best standard form contracts are those prepared and

approved by which of the following parties?

A. Office supply firm

B. Seller

C. Local Board of Realtors

D. Web source of generic legal forms

To the extent the tenant is permitted to alter the leased premises, the lease should clearly

state when this may be done, and under what circumstances. The lease must also be

clear about the ownership of such improvements once completed. Which of the

following terms refers to items of personal property that are attached to the real

property, are paid for and installed by the tenant, and may be removed by the tenant at

the termination of the lease?

A. Trade fixtures

B. Anchors

C. Concessions

D. Expense stop

Unlike the debt coverage ratio, the debt yield ratio (DYR) is not affected by the interest

rate or amortization period of the loan; the DYR is simply a measure of how large the

NOI is relative to the loan amount. Lenders who rely on this ratio are typically willing

to accept a minimum DYR of

A. 10%

B. 20%

C. 60%

D. 80%

The internal rate of return (IRR) on a proposed investment is the discount rate that

makes the net present value of the investment:

A. greater than zero

B. equal to zero

C. less than zero

D. greater than the opportunity cost of not investing

The City of Grand Rapids installed a new water main on Oak Street. The city then

decided to charge the property owners along Oak Street a proportional cost of the new

water main. If a property owner refuses to pay their proportional share of the cost, the

city may file a(n):

A. property tax lien.

B. assessment lien.

C. general lien.

D. mechanics’ lien.

Given the following information, calculate the loan-to-value ratio of this commercial

loan. Estimated net operating income in the first year: $150,000, Debt service in the

first year: $100,000, Loan amount: $1,000,000, Purchase price: $1,300,000

A. 0.08

B. 0.77

C. 1.30

D. 1.75

The majority of financing for the acquisition of land for development is most likely to

come from which of the following parties?

A. Developer

B. Banks

C. Pooled equity of a limited liability corporation (LLC)

D. Insurance companies

Suppose you are considering the purchase of an apartment building that has 12 units

that can be rented out at $1,050 per month. You have estimated operating expenses and

expected vacancy and collection losses for the first year to be $35,700 and $30,240,

respectively. You also have estimated that you will be able to generate an additional

$3,840 in the first year from garage rentals on the property. If the expected purchase

price of the property is $1,100,000 and you are planning on making a 10% down

payment, calculate the debt yield ratio.

A. 8.10%

B. 8.61%

C. 9.00%

D. 12.05%

Given the following information, calculate the overall capitalization rate. Sale price:

$950,000, Potential Gross Income: $250,000, Vacancy and Collection Losses: $50,000,

and Operating Expenses: $50,000.

A. 15.8%

B. 21.1%

C. 26.3%

D. 36.8%

Risk is the possibility that actual outcomes will vary from what was expected when the

asset was purchased. If investors require a higher rate of return for undertaking more

risk, the underlying assumption is that investors are:

A. risk neutral

B. risk averse

C. risk taking

D. hedging risk

Direct co-ownership implies that each co-owner holds a titled interest in the property,

but without exclusive possession with respect to the other co-owners. Which of the

following types of direct co-ownership is considered the closest to the fee simple

absolute estate?

A. Tenancy in common

B. Tenancy by the entirety

C. Condominium

D. Tenancy at Will

An investor agreed to sell a warehouse 5 years from now to the tenant who currently

rents the space. The tenant will continue to pay $20,000 rent at the end of each year

including year five in which he will purchase the building for an additional $150,000.

Assuming the investor’s required rate of return is 10%, how much is this deal presently

worth to the investor who was willing to sell?

A. $168,953.93

B. $241, 451.07

C. $363,678.50

D. $1,032,475.67

Because the mortgage conveys a complex claim for a long period of time, clauses are

included in anticipation of possible future complications. Which of the following

clauses requires a borrower to make monthly deposits into an account in order to pay

obligations such as property taxes, community association fees, or causality insurance

premiums?

A. Demand clause

B. Insurance clause

C. Escrow clause

D. Exculpatory clause

Maintenance and repair of a property is an ongoing process that can be divided into four

principal categories. Which of the following classifications includes ordinary repairs to

a building on a day-to-day basis (e.g. repairing a broken window, fixing a leaking roof)?

A. Custodial maintenance

B. Corrective maintenance

C. Preventive maintenance

D. Deferred maintenance

The yields on commercial mortgages have been approximately 2 percent higher, on

average, than the yields on comparable maturity treasury securities over the past 15

years. Often considered the signature risk of commercial mortgage lending, this spread

primarily represents:

A. Default risk

B. Interest rate risk

C. Pipeline risk

D. Fallout risk

A developer’s selection of an architect is a vital step in the development process as the

architect fulfills a number of important roles throughout the life of the project. As

compensation for contributions in the design phase, the architect is often given a

percentage of the construction cost. For moderately complex designs, the average

compensation will be:

A. 1 to 2%

B. 3 to 7%

C. 7 to 10%

D. greater than 10%

An investor originally paid $22,000 for a vacant lot 12 years ago. If the investor is able

to sell the lot today for $62,000, what would his annual rate of return be on this

investment (rounded to the nearest percent)?

A. 5%

B. 7%

C. 9%

D. 11%

The value of a property can be thought of as having two components, a land component

and a building component. Since the land component of the original cost basis is not

depreciable, it is important to understand how much of the property’s value is typically

attributed to the land for tax purposes. As a general rule, the value of land constitutes

what percentage (expressed as a range) of the total value of a commercial property?

A. 0% to 10%

B. 10% to 30%

C. 30% to 50%

D. 50% to 70%

Suppose that an income producing property is expected to yield cash flows for the

owner of $10,000 in each of the next five years, with cash flows being received at the

end of each

period. If the opportunity cost of investment is 12% annually and the property can be

sold for $100,000 at the end of the fifth year, determine the value of the property today.

A. $36, 047.76

B. $56,742.69

C. $83,333.33

D. $92,790.45

In recent years, lenders have been unwilling to relieve borrowers from personal liability

in the event of fraud, environmental problems, or unpaid property tax obligations.

Therefore, some lenders include a clause that pierces the single-purpose borrowing

entity to hold the actual borrower liable in such instances. This clause is commonly

referred to as a:

A. habendum clause

B. lockout provision

C. defeasance

D. “bad boy carve-out” clause

Given the following information, calculate the effective gross income multiplier for the

specific investment. Effective gross income: $49,500, First-year NOI: $18,750,

Acquisition price: $520,000, Equity Investment: 20%.

A. 0.036

B. 0.095

C. 10.5

D. 27.7

Real estate is defined as land and its permanent improvements. Which of the following

is an example of an improvement to the land?

A. Fence

B. Building

C. Sewer system

D. Personal property

While uncertainties involving the multitude of players and stages in the development

process provide a great deal of risk, market cycles tend to compound these risks. Out of

the four phases of a market cycle, which would be the most desirable point for a

developer to enter the market?

A. Trough

B. Expansion

C. Peak

D. Decline

Suppose a buyer agrees to purchase a tract of land for $40,000. The buyer is only able

to obtain a mortgage for $32,000. Rather than let the deal fall through, the seller agrees

to accept $4,000 in cash and a note from the buyer for the remaining $4,000. This type

of transaction is commonly referred to as a:

A. conventional loan

B. home equity mortgage

C. purchase money mortgage

D. reverse mortgage

Especially in terms of retail properties, which of the following attributes is considered

the most likely to result in drastic value differences between otherwise similar

properties?

A. Structural attributes

B. Financing attributes

C. Location attributes

D. Land attributes

Real estate market research is an important process used by analysts to facilitate a better

understanding of a property’s future profit potential. All of the following statements

regarding market research are true EXCEPT:

A. Real estate market research should always be flexible since the research depends

directly on the problem at hand.

B. Market research consists of a series of facts that fails to consider the role of investor

behavior in the decision-making process.

C. Most important data for a given market study often is not publicly available.

D. Market research should focus specifically on market segments for the property

involved, rather than on the aggregate real estate market.