Assume you have a choice between investing in either an equity REIT or Microsoft
stock (MSFT). Which point in the figure above is NOT on the efficient portfolio
frontier?
(a) A
(b) B
(c) C
(d) All points are on the efficient portfolio frontier
If a property has positive leverage, the owner should borrow as much as possible.
Junior liens are eliminated by a voluntary conveyance of a property to the mortgagee.
Property held as a personal residence cannot be depreciated.
A fee simple estates is a type of freehold estate.
In order to solve a compounding problem, you must know all four of the variables in
order to solve for the fifth variable.
A reciprocal easement agreement allows two or more parties to access each other’s
property.
The CMO investor assumes the prepayment risk of the underlying mortgages, although
the CMO modifies how the risk is allocated.
Investors may use attribution analysis to examine why the performance of an actively
managed real estate investment fund has exceeded its benchmark return.
When the internal rate of return on an investment increases as the loan-to-value ratio
increases, positive leverage exists.
In most instances, a developer’s repayment rate is set so that the development loan will
be repaid at the exact point that 100% of total project revenue is realized.
Tax losses can not be allocated to partners in a syndication.
The Federal Home Loan Mortgage Corporation’s (FHLMC) primary purpose is to
provide liquidity for conventional mortgage originators just as FNMA and GNMA did
for originators of FHA – VA mortgages.
In CDOs both equity and debt holder prefer riskier, higher-yielding collateral to collect
excess spreads.
A company can diversify its business activities by developing, owning and
subsequently leasing real estate to other companies. Because of the diversification
benefits, shareholder value is always increased.
Mortgage interest and property taxes are deductible for federal income tax purposes for
homeowners.
Properties with a higher ratio of debt are considered to also have a higher risk assuming
everything else is equal.
A general partner is personally liable for the debts of the partnership whereas a limited
partner has “limited liability” like shareholders in a corporation.
One benefit of leverage is that it reduces the variation in returns or losses.
Mortgage REITs use debt financing to increase their capital bases.
A technical default can result from failure to keep the property in repair.
Similar to decisions about owning or leasing equipment, the decision to own or lease a
property is basically just a choice between two financing alternatives.
With every CPM, the effective costs of borrowing are higher than the stated rate of the
loan.
Homeowners should not borrow refinancing costs because the effective rate of
refinancing will be higher.
A gross lease is riskier for the lessor than a net lease.
CDOs often include “B” notes, mezzanine debt and preferred equity as investments.
Financial risk increases as the amount of debt increases.
Lenders and investors worry about default, interest rate, marketability, and liquidity
risks.
The FRC Property Index includes property value increases or decreases only when
properties are sold since the sale price is the only true measure of market value.
Commitments for construction financing are usually contingent on commitments for
permanent financing.
The optimal portfolio is obtained by combining a group of securities which, by
themselves, offer the highest returns with the lowest risk.
Pro-ration involves a professional who rates the quality of the property.
REITs can sometimes capitalize rather than lease certain expenditures to increase FFO.
When using the cost approach to valuation, current market data for land values must be
obtained.
Inflation makes very little difference to lenders of and investors needing money.
Land can be viewed as having an “option” to develop the land.
When reporting on a real estate investment fund, a manager may treatthe financial
information as an estimate of performance based on the assumption that all of the
underlying properties could be sold at their appraised value.
The release price is the dollar amount of a loan that must be repaid when a lot is sold.
Origination fees are tax deductible as an interest expense.
One difference between the constant amortizing mortgage (CAM) and the constant
payment mortgage (CPM) is the interest paid and loan amortization relationship. With a
CAM, the loan amortization and interest paid are directly related and with the CPM the
loan amortization and the interest paid are inversely related.
Which of the following is FALSE regarding a planned amortization class (PAC)
tranche?
(A) It has the greatest degree of cash flow certainty
(B) Variable payments are received
(C) Payments are received over predetermined period of time
(D) Payments are received under a range of prepayment scenarios
Which of the following does NOT increase the noncredit risks of CDOs?
(A) Collateral management risk
(B) Certainty in average life of CDO tranches
(C) Higher correlation and liquidity
(D) None of the above
Which of the following typically would NOT be used as a basis for a participation loan?
(A) Increase in value over the holding period
(B) NOI in excess of a base amount
(C) Cash Flow after regular Debt Service
(D) Potential gross income
A mortgage agreement provides the lender with ________ interests.
(A) Unsecured
(B) Secured
(C) Nonpossesory
(D) Possesory
A property should be sold when which of the following occurs?
(A) The marginal rate of return is rising but less than the reinvestment rate
(B) The marginal rate of return is constant
(C) The marginal rate of return is zero
(D) The marginal rate of return is falling and becomes equal to the reinvestment rate
For which of the following reasons would a business prefer to own real estate rather
than lease it?
(a) If the business demands specialized or unique facilities
(b) Owning allows the business to develop skills in operating, maintaining, and repair
real estate and the associated facilities
(c) Owning reduces operating flexibility
(d) The capital commitments with owning are lower than the capital commitments
associated with leasing
(e) All of the above are reasons a business would prefer to own space rather than lease it
An investor pays $63.00 per share for stock in a given REIT. The REIT declares a
dividend of $4.00 per share and has an EPS of $2.37. Considering the recovery of
capital (ROC), what is the new cost basis of the stock acquired by the investor?
(A) $60.63
(B) $61.37
(C) $63.00
(D) $64.63
A borrower has secured a 30 year, $150,000 loan at 7% with monthly payments. Fifteen
years later, the borrower has the opportunity to refinance with a fifteen year mortgage at
6%. However, the up front fees, which will be paid in cash, are $2,500. What is the
return on investment if the borrower expects to remain in the home for the next fifteen
years?
(a) 6.00%
(b) 7.00%
(c) 13.00%
(d) 22.62%
(e) 28.89%
Which of the following investments in NOT a debt obligation of the issuer?
(A) CMOs
(B) MBBs
(C) MPTs
(D) MPTBs
In some cases, lenders require that borrowers obtain default insurance. The purpose of
such insurance is to:
(a) Decrease the effective interest rate on the loan
(b) Increase the value of the underlying property
(c) Protect the borrower from defaulting on the loan
(d) Protect the lender from losses associated with borrower default on the loan
Which type of deed offers the grantee the MOST protection?
(A) Quitclaim deed
(B) Special warranty deed
(C) General warranty deed
(D) Officer’s deed
The Acceleration Clause says notice of all, but which of the following must be given to
the mortgager?
(A) Acceleration of debt secured by the mortgage has taken place because of default
(B) Action required to cure default
(C) Time by which default must be cured
(D) Default
A property worth $16 million can be refinanced with an 80% loan at 9.5% over 20
years. The balance on the current loan is $12,148,566. Loan payments are $113,302 per
month. The loan balance in 10 years will be $8,396,769. If the property is expected to
be sold in 10 years, what is the incremental cost of refinancing?
(A) 9.71%
(B) 10.36%
(C) 12.42%
(D) 14.58%
A small office building is purchased of $1,200,000 with a balloon mortgage that is due
at the end of year 10. Payments are based on a 25 year amortization period. If one point
was charged, what annual amount can be deducted for tax purposes?
(A) $1,200
(B) $480
(C) $0
(D) $800
Using the same information as the question above, assume that 20 years after the bond
is issued, bond market investors require a 15 percent interest rate on the bond. What is
the market price of the bond?
(a) $6,835
(b) $6,863
(c) $7,653
(d) $14,270
A borrower has secured a 30 year, $150,000 loan at 7% with monthly payments. Fifteen
years later, an investor wants to purchase the loan from the lender. If market interest
rates are 5%, what would the investor be willing to pay for the loan?
(a) $75,000
(b) $111,028
(c) $118,478
(d) $168,646
Which of the following is NOT an alternative to foreclosure?
(A) Restructuring the mortgage loan
(B) Transfer of the mortgage to a new owner
(C) Redemption
(D) Prepackaged bankruptcy
Which of the following conditions will NOT cause a lease to be categorized as a capital
lease?
(A) It extends for at least 90 percent of the asset’s life
(B) It transfers ownership to the lessee at the end of the lease term
(C) It seems likely that ownership will be transferred to the lessee at the end of the lease
term because of a “bargain purchase” option
(D) The present value of the contractual lease payments equals or exceeds 90 percent of
the fair market value of the asset at the time the lease is signed
Disposition when dealing with real estate means which of the following?
(A) The way a property fits in with its surroundings
(B) Refinancing the property
(C) Improving property value
(D) Sale of the property
A property produces a first year NOI of $100,000 which is expected to grow by 2% per
year. If the property is expected to be sold in year 10, what is the expected sale price
based on a terminal capitalization rate of 9.5% applied to the eleventh year NOI?
(A) $1,308,815
(B) $1,283,152
(C) $1,263,158
(D) $1,257,992
Points are also known as:
(A) Third party charges
(B) Reduction in payment amount
(C) Loan discount fees
(D) Reduction of mortgage yield
Income after deducting vacancy that is available to pay expenses is referred to as:
(A) Potential gross income
(B) Effective gross income
(C) Net operating income
(D) Before-tax cash flow
The expected cost of borrowing does NOT depend on which of the following
provisions?
(A) The frequency of payment adjustments
(B) The inclusions of caps and floors on the interest rate, payment or loan balances
(C) The spread over the index chosen for a given ARM
(D) None of the above
In comparison to permanent financing, the rates and rate variability for a construction
loan would be:
Interest Rates Interest Rate Variability
(A) High Steady
(B) High Fluctuating
(C) Low Steady
(D) Low Fluctuating
Assume a portfolio is comprised of two securities, A and B, whose standard deviations
are 0.0412 and 0.0721, respectively. If their covariance is 0.002, what is their
coefficient of correlation?
(A) 0.005
(B) 0.115
(C) 0.673
(D) 1.485
A conforming loan:
(a) Exceeds the loan limits of loans that Fannie Mae and Freddie Mac can buy
(b) Meets loan limits of loans that Fannie Mae and Freddie Mac can buy
(c) Cannot be purchased by GSEs such as Fannie Mae and Freddie Mac
(d) Is another term for fixed-rate mortgage loan
Under which conditions would one be MOST LIKELY to see an interest rate swap?
(a) A borrower wants a fixed rate loan, but the bank only offers floating rate loans; the
borrower ‘swaps” loans with someone who has a fixed rate loan
(b) A borrower does not have enough equity for a conforming loan, so he or she takes
out a ‘second” mortgage loan
(c) A borrower does not have enough equity for a conforming loan, so he or she ‘swaps”
mortgage insurance for increased equity investment
(d) A bankruptcy court orders a lender to ‘swap” a debtors high interest rate for a lower
interest rate
Which of the following is FALSE concerning buydown loans?
(A) They are often used during periods of high inflation
(B) They always lower the rate on the loan for the borrower for the entire loan term
(C) Help borrowers qualify for a loan
(D) They can be offered by home builders
Which of the following statements regarding subprime mortgages is TRUE?
(a) Subprime mortgages are not Ginnie Mae guaranteed, so CMO investors are exposed
to default risk
(b) Subprime mortgages are not Ginnie Mae guaranteed, so securities backed by
subprime mortgages cannot be issued
(c) CMOs backed by subprime mortgages cannot be used as collateral for CDOs
(d) Because of diversification, securities backed by subprime loans and no more risky
than those back by prime loans
Which of the following is NOT a good method of title assurance?
(A) Seller provides a warranty in the deed
(B) An attorney searches recorded documents
(C) Title insurance is purchased
(D) Seller provides a quitclaim deed
Which of the following is FALSE regarding mortgage-backed bonds (MBBs):
(A) Their issuer retains ownership of mortgages
(B) Their maturity is indefinite at issuance
(C) They are issued with fixed coupon rates
(D) They are usually underwritten by investment banking companies
A property is encumbered as follows:
First mortgage, A: $250,000
Second mortgage, B: $40,000
Third mortgage, C: $10,000
How much can mortgagee B pay for the property at a foreclosure sale without having to
raise additional funds?
(A) $290,000
(B) $40,000
(C) $300,000
(D) $50,000
Which of the following is NOT a benefit of a sale-leaseback of land for investors?
(A) It is a way of effectively obtaining 100% financing
(B) The lease payments are tax deductable
(C) Land can not be depreciated for tax purposes
(D) The land value may increase over the holding period
What is usually executed at the same time as a mortgage and creates the obligation to
repay the loan in accordance with its terms?
(A) Recording acts
(B) Ownership interests
(C) Method of payment
(D) Promissory note
Which of the following is NOT one of the primary benefits of investing in real estate
income property?