An investor calculates an incremental return of renovating a building of 14%. Other
properties provide a 12.5% overall rate of return to equity investors. Therefore, the
property is a good investment.
Generally, prices for zero coupon mortgage-backed bonds are more sensitive to interest
rate changes than interest bearing MBBs.
The use of a CPI index in lease contracts shifts risk to the tenant.
It is illegal for the lender to hold back funds from the developer.
If a company’s space requirements are far less than what is optimal to develop on a
given site, leasing would tend to be more favorable.
The cash equivalent value of a house that sold with favorable financing is usually less
than its sale price.
A due on sale clause which specifies that the mortgage can accelerate the debt if the
property is sold without the mortgagee’s permissions is a typical clause in a mortgage
document.
When used to evaluate the performance of an investment, the geometric mean is
considered to be superior to the arithmetic mean.
A purchaser at a tax sale receives a deed to the property at the time of the sale.
In general, if a company assumes that the residual value at the end of the holding period
is always equal to the book value, the decision to own versus lease will be biased
towards owning.
A second mortgage is a junior lien mortgage that is sometime used to bridge the gap
between the price of a property and the sum of the first mortgage and down payment.
It is proper to include an estimate for developer profit as a cost of development when
projecting net cash flows and evaluating whether a required rate of return will be met.
When evaluating the incremental costs of borrowing, if the interest rate is higher on the
larger loan amount, the incremental cost of the additional funds borrowed tends to be
lower than the rate on the larger loan.
Title insurance protects the buyer from title claims against the property.
Overage rent is rent that exceeds expenses.
Investors retain prepayment risk on MBBs, but issuers incur this risk with MPTs.
One way to calculate the present value of a single payment is with the following
formula: PV = FV * (1+i).
A mortgage REIT is a REIT that primarily invests in mortgages rather than equity
ownership.
REITs must be passive investments with external advisors.
Usually ground leases are for relatively short periods of time.
Estimating the land value for an improved property cannot be accomplished using the
sales comparison method of valuation.
Under lien theory, title and the right to possession pass from the mortgagor to the
mortgagee when the mortgage is executed.
Negative amortization reduces the principal balance of a loan.
If a premium is paid on a CMO issue (at the time of issue), yields will increase as
prepayment rates accelerate.
Assume that an investment, with an single initial cost of $1,000 and a yield of $50
monthly for 10 years, had a 7% IRR in the 60th month and a 7.2% IRR five months
later. The IRR can be 6.8% in the 62nd month.
Real estate has a lot of inflation risk.
A borrower finds that the incremental cost of borrowing an extra $10,000 is 14%. A
second loan can be obtained at 15% so the borrower would be better off by borrowing
with the smaller loan and a second mortgage.
A feasibility study analyzes whether a tract can be purchased and developed profitably.
A loan in which the lender receives part of the proceeds from the sale of the property is
known as a convertible loan.
In 2008, Fannie Mae was spun off in an initial public offering as a private company.
Which of the following situations is NOT a common cause for the use of a
purchase-money mortgage?
(A) The buyer cannot come up with the down payment needed to qualify for a mortgage
(B) The seller wants to receive the gain from the sale in installments
(C) Third-party mortgage financing is too expensive of unavailable
(D) The seller desires to artificially raise the price of the property by receiving a
higher-than-market interest rate
Which of the following is also referred to as a negative amortization loan?
(A) Participation loan
(B) Accrual loan
(C) Convertible loan
(D) Interest only loan
A borrower obtains a $150,000 reverse mortgage with monthly payments over 10 years.
If the interest rate of the mortgage loan is 8%, what is the monthly payment received by
the borrower?
(a) $820
(b) $863
(c) $1,250
(d) $1,820
Risk is an important component of interest rates. Which of the following risks is NOT a
determinant of interest rates?
(A) Default risks
(B) Interest rate risks
(C) Institutional risks
(D) Marketability risks
A property is financed with an 85% loan-to-value ratio at 10% interest over 25 years.
What would the BTIRRE on equity be estimated at given that the BTIRRP is 10.75%?
(A) 10.1%
(B) 10.4%
(C) 15.0%
(D) 13.2%
A property, if sold today, will provide the equity investor with $150,000 in cash flow
after taxes. If the property is held, the annual after-tax cash flow received by the
investor will be as follows: $18,000 for years 1 to 5, $24,000 for years 6 to 10. If held
and sold in 10 years, the property is expected to provide $180,000 in after-tax cash flow
to the investor. What should the investor do if she can receive a 14% rate of return by
investing the sales proceeds today in an different project?
(A) Sell the property and invest proceeds in the second property
(B) Do not sell the property
(C) Renovate the property
(D) Can”t tell without knowing the cash flow from the second property
Which loan in the above table is a FRM?
(A) Loan 1
(B) Loan 2
(C) Loan 3
(D) Loan 4
Which of the following solutions is LEAST likely to be acceptable to a mortgagee when
discussing alternatives to foreclosing a property?
(A) Permanently extending the amortization period
(B) Finding someone else to assume the mortgage
(C) Providing a temporary grace period during which principal and interest are not paid
(D) Permanently reducing the interest rate
Consider the table above. An investor-developer demands a return of at least 9percent
on cost. Which of the following statements is TRUE based on the information above?
(a) Neither project produces a sufficient expected return
(b) The 275 unit project produces a sufficient return, but the 300 unit project does not
(c) The 300 unit project produces a sufficient return, but the 275 unit project does not
(d) Both projects produce sufficient return, but the 275 unit project produces a higher
return than the 300 unit project
Which of the following statements is TRUE regarding general partnerships?
(a) They usually are suggested for groups of individuals that are seeking to form a
business entity to invest in real estate because of the unlimited liability of each partner.
(b) They usually are not suggested for groups of individuals that are seeking to form a
business entity to invest in real estate because of the unlimited liability of each partner.
(c) They protect each of the partners from potential losses associated with the
partnership’s business activities
(d) They have assessed income taxes at a lower rate than corporations
If you saw a table containing the following factors, what kind of interest factor would
you be looking at?
(a) Present value of a single amount
(b) Future value of a single amount
(c) Present value of an annuity
(d) Future value of an annuity
A building owner charges net rent of $20 in the first year, $21 in the second year, and
$22 in the third year. Using a 10percent discount rate, what is the effective rent over the
three years?
(a) $20.00
(b) $20.94
(c) $21.00
(d) $21.73
(e) $22.00
A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5%
and monthly payments. What portion of the first month’s payment would be applied to
interest?
(a) $694
(b) $1,042
(c) $1,342
(d) $1,355
(e) Not enough information
A property is financed with a 75% loan at 11.5% over 25 years. The property produces
an ATIRR on total investment of 7.34% based on a tax rate of 31%. What can be said
about the leverage associated with the property?
(A) Negative leverage exists
(B) Positive leverage exits
(C) No leverage exists
(D) Can”t tell without knowing the ATIRR on equity
A syndicate that raises capital before identifying any or all of the properties it will
eventually own is known as a(n):
(A) Safe harbor
(B) Accredited investor
(C) Caveat
(D) Blind pool
Use the information in problem 1, except assume that the loan will be repaid in 5 years.
What is the incremental cost of borrowing the extra money?
(A) 13.95%
(B) 13.67%
(C) 14.42%
(D) 12.39%
What is the expected return for a real estate investment fund with a Beta of 1.87, given
a risk free rate of 2.7% and an expected return of 11.2% for the market? (A)
a. 18.6%
b. 11.2%
c. 15.9%
d. 2.7%
Considering the REIT in the question above, at the very least what dividend payment
must it make to maintain its tax exempt status?
(A) $1.90
(B) $2.85
(C) $3.80
(D) $5.70
For which of the following investments is the date of maturity known?
(A) CMOs
(B) MBBs
(C) MPTs
(D) MPTBs
Which of the following is NOT a determinant of interest rates for single family
residential mortgages?
(A) The demand and supply of mortgage funds
(B) Inflation expectations
(C) Liquidity
(D) The demand and supply of apartments
Which of the following is NOT a component of lease rollover risk?
(a) Commissions paid to a leasing agent to find a new tenant
(b) Costs of tenant improvements demanded by new tenants
(c) Liquidity risk
(d) Reduced revenues from vacancy until a new tenant is found
Which of the following is the main objective of FTL legislation?
(A) More effective advance disclosure of settlement costs
(B) More informative disclosure of the cost of credit
(C) Elimination of kickbacks and unearned fees
(D) A reduction in the amount of escrow placed in accounts for homeowners
Which of the following is TRUE concerning Wraparound Loans?
(A) The borrower makes payments on existing loan
(B) The lender makes payments on existing loan
(C) The lender only makes payments on the second mortgage
(D) The borrower only makes payments on the second mortgage
When purchasing a $210,000 house, a borrower is comparing two loan alternatives. The
first loan is a 90% loan at 10.5% for 25 years. The second loan is an 85% loan for
9.75% over 15 years. Both have monthly payments and the property is expected to be
held over the life of the loan. What is the incremental cost of borrowing the extra
money?
(A) 20.25%
(B) 16.17%
(C) 11.36%
(D) 12.42%
When is seller financing NOT used?
(A) The seller desires to take advantage of the installment method of reporting the gain
from sale
(B) The buyer does not qualify for long term mortgage credit because of low down
payment or difficulty meeting monthly payments
(C) Third-party mortgage financing is less expensive or easily available
(D) The seller desires to artificially raise the price of the property by offering a
lower-than-market interest rate on the mortgage
Tom invested $20,000 in a limited partnership. His share of liabilities from mortgage
debt was initially $45,000. The property suffered a loss in income during the first year,
of which Tom’s share was $5,000. However, in years two through four income allocated
from the account equaled a total of $9,000 ($3,000 per year). The reduction in debt at
the end of year 4 from amortization of the loan is equal to $1,100. What is Tom’s basis
in the partnership interest at the end of year 4?
(A) $67,900
(B) – $9,900
(C) $77,900
(D) $70,100
A reversion and a remainder are similar in that:
(A) Both can be sold or mortgaged
(B) Both cause the property to go back to the grantor after the sale
(C) Neither is an actual interest in the property
(D) Neither is considered a future estate
If an investment earns 12% annually:
(a) An equivalent monthly investment would have to earn a higher equivalent nominal
rate to yield the same return
(b) An equivalent monthly investment would have to earn a lower equivalent nominal
rate to yield the same return
(c) An equivalent monthly investment would have to earn the same equivalent nominal
rate to yield the same return
(d) A relation cannot be determined between a monthly and annual investment
Which of the following REIT types is organized to acquire the specific property or
properties described in its prospectus?
(A) A property trust
(B) A mixed trust
(C) A purchasing trust
(D) An exchange trust
Which of the following imposes certain ownership and minimum capital requirements
to avoid “dummy” corporations acting as sole corporate general partners?
(A) Safe harbor rules
(B) Caveat rules
(C) Blind pool rules
(D) Regulation corporation rules
Why would a developer be willing to manage a completed project even after it has been
sold?
(A) The developer knows the project better than other management companies and,
therefore, could manage the property more efficiently
(B) The developer could profit from the lucrative management fees being charges by
management companies
(C) Knowledge of the tenant’s needs and the current leasing market might give the
developer better insight with respect to future developments
(D) All of the above
Begin with a single sum of money at period 0. First, calculate a future value of that sum
at 12.01%. Then discount that future value back to period 0 at 11.99%. In relation to the
initial single sum, the discounted future value:
(a) Is greater than the original amount
(b) Is less than the original amount
(c) Is the same as the original amount
(d) Cannot be determined with the information given
When evaluating an investment in a mortgage pass-through security, which of the
following is NOT one of the characteristics of the underlying mortgage pool that should
be considered?
(A) The amount of overcollateralization of the mortgage pool
(B) The geographic distribution of the mortgages
(C) The amount of seasoned mortgages included in the pool
(D) None of the above should be considered.
A property could be sold today to provide an after-tax cash flow from sale of $800,000.
The current after-tax cash flow from operations is $20,000, which is expected to grow
by 4% per year. If sold next year, the property is expected to provide an after-tax cash
flow of $824,000. What is the marginal rate of return for holding the property for an
additional year?
(A) 5.6%
(B) 2.6%
(C) 3.1%
(D) 9.3%
Your friend has a trust fund that will pay him $100,000 at the end of 10 years. Your
friend, however, wants his money today. He promises to sign his trust fund over to you
if you give him some money today. You require a 20% interest rate on money you lend
to friends. How much would you be willing to lend under these terms?
(a) $16,151.
(b) $50,000
(c) $80,000
(d) $0it would be impossible to earn 20% interest on the loan.