Finance 99808 | Course Paper

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

expenses associated with obtaining the mortgage should be included, not the settlement

costs associated with obtaining ownership of the property. 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

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

Given the following expected cash flow stream, determine the NPV of the proposed

investment in an income producing property and determine whether or not the

investment should be pursued. Investment Horizon: 5 years; Expected Yearly Cash

Flow in each of the next five years: $127,628. Expected Sale Price at end of 5 years:

$1,595,350; Opportunity Cost of Investment 6%; Current Market Price of Property:

$1,750,000

A. NPV is -$20,246; Decision is to invest

B. NPV is -$20,246; Decision is not to invest

C. NPV is $249,967; Decision is to invest

D. NPV is $249,967; Decision is to not invest

Retail establishments are found in a variety of forms, the simplest of which is: (Hint:

fast-food franchise)

A. Freestanding retail outlet

B. Strip center

C. Power center

D. Regional mall

Suppose you own a house that you are renting out to a group of college students for the

10 month academic year. You are charging $1000 per month in rent. You will collect the

first rent payment today and then on the 1st of the month each month thereafter. What is

the value of this investment opportunity to you today if you could reinvest your income

at a rate of 6%?

A. $9,677.77

B. $9,730.41

C. $9,779.06

D. $11,677.03

Estimating the market value of real estate is complicated by the unique characteristics

of real estate markets. In contrast to stock markets, real estate markets are characterized

by all of the following EXCEPT:

A. No two assets are considered perfect substitutes for one another.

B. Market prices are revealed almost instantaneously to prospective buyers.

C. Transactions occur infrequently.

D. The physical location of the asset being sold plays an important role in the pricing

process.

An important distinction both practically and conceptually is the difference between an

easement and a license. All of the following characteristics pertain to a license

EXCEPT:

A. A license is revocable by the grantor.

B. A license can be granted orally.

C. A license is enduring.

D. A license grants permission to use another’s land for a specific and limited purpose.

Based on your understanding of the effect of agglomeration economies in real estate,

you would expect institutional investors to most favor real estate investments in which

of the following areas?

A. small urban markets

B. large urban markets

C. small rural markets

D. large rural markets

There are a number of different types of listing contracts that can be used when

marketing a property. Which of the following types of listings requires the broker to be

paid a commission if anyone, other than the owner, sells the property during the

contract period?

A. Open listing

B. FSBO listing

C. Exclusive agency listing

D. Exclusive right of sale listing

You have taken out a $300,000, 5/1 ARM. The initial rate of 5.4% (annual) is locked in

for 5 years. Calculate the payment after recasting the loan (i.e., after the reset) assuming

the interest rate after the initial lock period is 8.0%. (Note: the term on this 5/1 ARM is

30 years)

A. $1,684.59

B. $1,784.79

C. $1,887.75

D. $2,138.02

Though difficult to accurately measure, the market value of U.S. real estate held by

non-real estate corporations is estimated to exceed $10 trillion. All of the following are

examples of noninvestible commercial real estate EXCEPT:

A. Medical office buildings owned by the hospital

B. Branch offices owned by the bank

C. Plant and equipment owned by steel corporations

D. Assembly plant building owned by a group of investors as part of an LLC

When fund managers collect contributions from multiple sources and “commingle”

them to purchase properties, this is referred to as the use of commingled real estate

funds. Which of the following institutional investors utilize commingled real estate

funds for approximately one-half of their investments in real estate?

A. Investment banks

B. Life insurance companies

C. Real estate advisory firms

D. Pension funds

Traditional zoning regulations are criticized for often being too rigid in forcing uniform

types of development. One proposed solution to this issue allows traditional zoning

requirements to vary in exchange for an enhancement to the community, such as the

construction of a park. This is more commonly referred to as a:

A. Planned unit development

B. Performance standard

C. Impact fee

D. Growth restriction

Gross income multiplier analysis assumes that the subject and comparable properties

are collecting market rents. Therefore, it is frequently argued that an income multiplier

approach to valuation is most appropriate for properties with short-term leases. Which

of the following property types, therefore, would we find it most appealing to use a

gross-income multiplier in our analysis?

A. Apartments

B. Office

C. Industrial

D. Retail

The monthly mortgage payment divided by the loan amount is commonly referred to as

the:

A. loan balance

B. effective borrowing cost

C. lender’s yield

D. monthly loan constant

Since most data for a given market study is not readily available, analysts must be

creative

in their use of data that they are able to obtain. The primary source for detailed

household demographic information is:

A. the U.S. Bureau of the Census

B. the Federal Reserve

C. the local tax collector’s office

D. Not available publicly

The final step in a real estate transaction is the closing. In most closings, which party is

responsible for seeing that the closing is completed successfully?

A. Escrow agent

B. Lender

C. Selling Broker

D. Listing broker

The expected costs to make replacements, alterations, or improvements to a building

that materially prolong its life and increase its value is referred to as:

A. operating expenses

B. capital expenditures

C. vacancy losses

D. collection losses

Contracts for sale may contain sections that cause implementation of the contract to

depend on the successful completion of some prior action such as the buyer’s ability to

obtain financing on specified terms. This type of contract is commonly referred to as

a(n):

A. contract assignment

B. equitable title

C. contract with contingencies

D. uniform settlement statement

According to the bid-rent model, which of the following changes in the model’s

underlying assumptions would most likely result in a decrease in rents for properties

closest to the central business district (CBD)?

A. An increase in an individual’s hourly wage

B. An increase in the average traveling speed of the individual’s commute

C. An increase in the number of households attempting to live in the area

D. An increase in the number of days an individual must commute to work

Given the following information, calculate the total amount of annual operating

expenses for this income-producing property. Lawn care: $10,000, Property taxes:

$24,000, Maintenance: $35,000, Janitorial: $25,000, Security: $32,000, Debt service:

$145,000.

A. $102,000

B. $126,000

C. $247,000

D. $271,000

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

Mortgage insurance rates vary with the perceived riskiness of the loan. Which of the

following scenarios would result in a higher mortgage insurance premium?

A. Lower loan-to-value ratio

B. Shorter loan term

C. Stronger credit record of the borrower

D. A “cash-out” refinancing loan

A lien is an interest in real property that serves as security for an obligation. Which of

the following is an example of a general lien?

A. Property tax and assessment lien

B. Mortgage lien

C. Lien arising from a court judgment unrelated to ownership of the property

D. Mechanics’ lien

In most pooled ownership forms a single partner is empowered to act on behalf of the

investors in terms of making property investment decisions. Based on your

understanding of the different types of pooled ownership which of the following

structures would we expect this issue to be the least prevalent?

A. General partnership

B. Limited partnership

C. C corporation

D. Subchapter S corporation

A traditional zoning ordinance includes all of the following EXCEPT:

A. Minimum setback requirements

B. Minimum lot dimensions

C. Provisions for special use districts

D. Performance standards

Most Adjustable Rate Mortgage (ARM) loans have been marketed with a temporarily

reduced interest rate commonly referred to as a:

A. rate cap

B. teaser rate

C. payment cap

D. prepayment rate

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%

The syndication agreement generally creates a principal/agent relationship in which the

syndicator (agent) is empowered to act on behalf of the investors (principals). In most

principal/agent relationships, there is the concern that the agent will act in the agent’s

best interest, not in the best interests of the principal. This issue is more commonly

referred to as:

A. adverse selection

B. moral hazard

C. dual agency

D. signaling

A fixture is an object that formerly was personal property but has become real property.

Of the following four rules for determining whether an object has become a fixture,

which is the most dominant (i.e. if there is a conflict, which rule prevails)?

A. Manner of the attachment

B. Character of the article and manner of adaptation

C. Intention of the parties

D. Relation of the parties

At the closing, the buyer will be credited for a number of costs that have been paid

up-front (or will be paid after closing) as well as a number of prorated expenses that

account for the period of time during which the seller occupied the house. All of the

following items detailed in the closing costs involve credits that are commonly passed

on to the buyer EXCEPT:

A. Earnest money

B. Hazard insurance premiums

C. Property taxes

D. Mortgage interest

Jim has hired a real estate broker to help facilitate the sale of his home. If the broker

requires a commission of 6%, how much will Jim clear from the sale (after the

commission has been paid) if he is able to sell his house for $478,723 (Assume that Jim

has already paid off his mortgage)?

A. $424,528

B. $450,000

C. $478,723

D. $507,446