CHAPTER 21
Enhancing Value through Ongoing Management
Test Problems
1. The Institute of Real Estate Management (IREM) awards which of the following
designations?
2. A contractual relationship in which an individual must act in the best interests of a
principal when dealing with a third party is termed:
3. The requirement of a real estate property manager to act in the best interests of the
landlord when dealing with a tenant is termed:
4. Which of these is not typically a responsibility of a property manager?
5. Remodeling and rehabilitation:
6. Both the owner and the manager may be better off if property management
compensation were based on a percentage of the property’s:
7. The following are necessary for a lease to be valid, except:
8. The asset manager is generally NOT responsible for:
9. Demolition of an existing property on an urban site will likely occur:
c. When the site value, assuming a new use, exceeds the value of the site under its
10. For non-real estate corporations, which of the following is not a potential
advantage of a real estate sale-leaseback?
c. The firm benefits from property appreciation that occurs after the
Study Questions
1. An investor purchased a property with an equity investment of $100,000 and an
$800,000 mortgage. She has held the property for five years, and the mortgage
now has a balance of $750,000. The market value of her property is estimated to
be $950,000. What is her present equity investment?
Solution: Her current equity investment in the property is $200,000, which is
2. What should be included as costs to be matched by value added after
rehabilitation?
Solution: An improvement, such as rehabilitation, should be undertaken only if
the value added to the property exceeds the cost of improvements, which include
3. In what ways are the maintenance and repair decision and the rehabilitation
decision similar? How do they differ?
Solution: Maintenance and repair costs include expenditures for custodial,
corrective, and preventive costs. Sometimes, costs related to the performance of
Rehabilitation costs include painting, roof replacement, or the replacement of
other deteriorated portions of the building. The need to perform rehabilitation
The decisions to undertake either maintenance and repair costs or rehabilitation
costs are investment decisions. The decision to perform or forego maintenance
4. What factors can change after rehabilitation of a property to produce a higher
“after” value than “before” value?
Solution: The rehabilitation of a property can result in a larger net operating
5. What does the property management agreement accomplish?
Solution: The management agreement is the basis of the relationship between the
property owner and property manager. This management agreement establishes
6. How does routine maintenance and repair affect a property’s performance?
Solution: Routine maintenance and repair expenditures maintain the condition and
economic performance of a property. These costs do not increase the value or
economic performance of a property but merely maintain the property’s level of
7. Define deferred maintenance and list some examples.
Solution: Deferred maintenance describes costs related to ordinary maintenance
that is not performed at the time a problem is detected. Examples of deferred
8. How is the financial compensation for property managers usually determined?
What “agency” problem does this seem to create?
Solution: The typical property management fee is based on a percentage of gross
rental income. An agency problem is created by this arrangement because the
property manager may be motivated to overly maintain the property or pursue
9. Why is the tenant mix critically important to the performance of shopping center
investments?
Solution: The correct mix of tenants in a shipping center can maximize each
individual tenant’s sales and the property’s total rent potential. Synergies are
10. In the real estate asset management/investment advisory business, why has
performance-based management replaced, or at least partially supplemented, the
“traditional” scheme for compensating some asset managers?
Solution: The practice of compensating asset managers based on the value of net
assets managed creates an agency problem because managers have the incentive
11. In the context of asset management agreements in the private commercial real
estate industry, what is a benchmark index? What is the most typical benchmark
index?
Solution: A benchmark index is a reference point that can be used as a standard to
measure the relative performance of an asset manager. The typical benchmark
12. With respect to complying with applicable landlord-tenant laws, is it easier to
manage an apartment complex or an office building? Explain.
Solution: In general, managing a commercial property, such as an office building,
is less problematic than managing an apartment complex for various reasons.
State law governs landlord-tenant relationships in the commercial arena, and state