FIN 98779 | Course Paper

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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%

A fishing company was formed in Juneau, Alaska. Over the next decade, a canning

plant, a processing plant, and a boat repair facility also opened in Juneau. This is an

example of:

A. industry economies of scale

B. agglomeration economies

C. location quotient

D. linkages

Most research oriented universities have many different colleges, each with separate

administrations, students, curricula, and facilities. However, the university continues to

exist as a total unit because of:

A. industry economies of scale

B. locational monopoly

C. economic inefficiencies

D. negative externalities

The benefit of being classified as a capital gain is that the income is subject to a tax rate

that maxes out at 15%, which may be well below the tax rates associated with

depreciation recapture income and ordinary income for a particular investor. In order to

qualify for the lower capital gain tax rate, the property being sold must be held for more

than:

A. 1 month

B. 3 months

C. 6 months

D. 12 months

Assume that a borrower has a choice between two comparable fixed-rate mortgage

loans with the same interest rate, but different mortgage terms, one being a 30-year

mortgage and the other a 15-year mortgage. Under financially unconstrained

circumstances, which of the following statements best describes the borrower’s

preference?

A. The borrower would prefer the 30-year mortgage.

B. The borrower would prefer the 15-year mortgage.

C. The borrower would be indifferent between the two mortgages.

D. The borrower is unable to compare mortgage loans of two different maturities.

A law requiring any contract conveying a real property interest to be in writing in order

to be enforceable is a modern application of the:

A. Statute of Frauds

B. doctrine of constructive notice

C. habendum clause

D. actual notice

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

Suppose you purchased an income producing property for $95,000 five years ago. In

Year 1, you were able to negotiate a lease that paid $10,000 per year at the end of each

year. If you are able to sell the property at the end of year 5 for $100,000 (after

receiving our final lease payment), what was the internal rate of return (IRR) on this

investment?

A. -18.18%

B. 1.03%

C. 9.57%

D. 11.37%

While several kinds of real property conveyances result from events beyond the control

of the grantor, the majority of conveyances are voluntary through a deed. Which of the

following is an example of a voluntary conveyance of real property with a deed?

A. Patent

B. Probate

C. Condemnation

D. Implied Easement

Given the following information, calculate the total annual tax liability of the

homeowner. Market value of property: $350,000, Assessed value of property: 40 % of

the market value, Exemptions: $2,000, State Millage Rate: 0.25 mills, County Millage

Rate: 13.70 mills.

A. $34.50

B. $1,890.60

C. $1,925.10

D. $4,685.10

Suppose a developer is interested in building a new townhome community. Through his

market research, the developer has determined that the target market makes up 10%

(core market share) of the households that currently reside in the metropolitan area. If

an analysis of data from the MLS indicates that there should be approximately 500

residential sales in this area over the next year, what is the projected number of units the

developer could expect to sell in year 1 if he is able to capture 50% of the market

potential?

A. 500 units

B. 250 units

C. 50 units

D. 25 units

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.

Bill and Mike go in together to purchase 342 acres of land to use for hunting and family

vacations. Ten years later, Bill dies and Bill’s wife wants to sell his half of the land.

Mike informs her that, unfortunately, she has no claim to the land and that upon Bill’s

death, his ownership interest transferred to Mike. What type of co-ownership did Bill

and Mike have?

A. Tenancy by the entireties

B. Tenancy in common

C. Joint tenancy

D. Condominium

While predicting real estate cycles is difficult, a key indicator used to evaluate where a

property is within the cycle is:

A. the level of household income

B. the form of land use

C. the size of the property

D. the number of building permits issued

Assume that an industrial building can be purchased for $1,500,000 today, is expected

to yield cash flows of $80,000 for each of the next five years (with the cash flows

occurring at the end of each year), and can be sold at the end of the fifth year for

$1,625,000. Calculate the internal rate of return (IRR) for this transaction.

A. 3.14%

B. 6.78%

C. 9.20%

D. 10.37%

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

A public planning movement that explicitly advocates a cul-de-sac hierarchy of

development, an automobile oriented society, and separated land use is more commonly

referred to as:

A. urban sprawl

B. urban service area

C. traditional residential planning

D. new urbanism

Which of the following types of ownership estates is the most complete bundle of

rights, and therefore carries the greatest value?

A. Fee simple absolute

B. Fee simple conditional

C. Ordinary life estate

D. Legal life estate

Under certain circumstances, investors are permitted to reduce the amount of the

taxable income that they report by an amount that is intended to reflect the wear and

tear of an asset over time. This is commonly referred to as:

A. appreciation

B. depreciation

C. capital gains

D. capital losses

Growth management laws at the state level require local jurisdictions to plan for and

meet certain requirements. One such requirement prohibits local development unless

adequate infrastructure, schools, police/fire protection, and social services have been

put in place first. This requirement is referred to as the:

A. economic and environmental impact requirement

B. concurrency requirement

C. affordable housing requirement

D. extraterritorial jurisdiction requirement

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

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

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

When the supply of space exceeds the demand, it is common for owners to provide the

tenant with a period of free or perhaps reduced rent. This is commonly referred to as

a(n):

A. tenant improvement allowance

B. concession

C. sublease

D. expense stop

Assume that a piece of land is currently valued at $50,000. If this piece of land is

expected to appreciate at an annual rate of 5% per year for the next 20 years, how much

will the land be worth 20 years from now?

A. $100,898.99

B. $112,633.09

C. $123,860.81

D. $132,664.89

There are three main types of income subject to federal taxation. Which of the

following types of income includes income generated from rental real estate

investments?

A. Active income

B. Portfolio income

C. Passive activity income

D. Residual income

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 theinvestment 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%

In contrast to rent for residential units, rent for U.S. commercial properties is typically

quoted as:

A. a dollar amount per month

B. a dollar amount per year

C. a monthly cost per square foot

D. an annual cost per square foot

The measure of cash flow most relevant to investors in income-producing real estate is

the after-tax cash flow (ATCF) from property operations. Therefore, it is important to

know that the maximum federal income tax rate on individuals as of 2012 is:

A. 25%

B. 30%

C. 33%

D. 35%

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

A new residential development will face competition from other new developments,

other builders, and sales of existing homes. To determine if demand in that market

segment will be sufficient to justify proceeding with the project, a developer would be

most interested in estimating a:

A. capture rate

B. capitalization rate

C. risk-free rate

D. risk premium

In order for the board of adjustment to approve a variance, all of the following

conditions must be met EXCEPT:

A. The owner must be unable to use the lot as zoned.

B. The condition is common to other parcels of land in the vicinity

C. The variance must not materially change the character of the neighborhood.

D. The condition is unique to the lot.

One of the main differences between residential mortgage loans and permanent

financing of commercial real estate lies in the allocation of liability in the case of

default. In commercial real estate, a “bankruptcy remote” special-purpose entity is

created that shields the actual borrower from personal liability. When a lender cannot

lay claim to the personal assets of the defaulted borrower, this type of loan is commonly

referred to as a:

A. nonrecourse loan

B. mini-perm loan

C. partially amortizing loan

D. interest-only loan

Suppose your personal financial goal is to retire with a million dollars in your savings

account. How much must you deposit monthly in an account paying 5% a year (with

interest being compounded monthly and your deposits occurring at the end of the

month), to accumulate $1,000,000 by your 65th birthday if you begin your deposits on

your 22nd birthday? (Note: Assume that you started with no savings in the account

prior to your first deposit at age 22 and you do not make a deposit on your

65thbirthday)

A. $552.13

B. $701.90

C. $21,282.95

D. $186,354.63

A planned unit development (PUD) is a residential development that differs from

traditional residential subdivisions in all of the following ways EXCEPT:

A. It encompasses a blend of detached single family, attached single family, townhouses

and apartments.

B. It typically has larger individual lots with extensive side-yards on the property.

C. It typically includes a variety of common areas

D. It typically includes a variety of recreational facilities.