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129 Cards in this Set
- Front
- Back
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Conceptual Questions |
Ch. 11, 12, 16, 19, 21 |
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Debt Coverage Ratio measures the degree to which the NOI from the property is expected to exceed the mortgage payment |
True |
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Expense stops shift the risk of increases in expenses to the lesse while allowing the lessor to retain the benefit of any decrease in expenses |
True |
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The Use of a CPI index in lease contracts shifts risk to the tenant |
True |
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A gross lease is risker for the lessor than a net lease |
True |
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The debt coverage ratio is used by lenders to indicate the riskiness of a loan |
True |
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Property held as a personal residence cannot be depreciated Residential property over 27.5 years where as a non-residential property is depreciate over 31.5 years |
True/True |
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The deductibility of depreciation to calculate taxable income will usually cause the tax rate to be lower than the actual tax rate When the sale of a passive activity produces a capital loss and unused passive losses from previous years remain, the unused losses can be used to offset any other source if income |
True/True |
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Which of the following is NOT one of the Primary Benefits of investing in real estate income property |
E. Business Cycle - real estate income properties tend to generate higher income when other investments are in decline |
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Which of the following statements regarding equity is TRUE? |
A. The amount of equity an investor has in a property may change over time if the property value and loan balance changes |
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An effective tax rate: |
D. All the above |
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The real estate industry |
A. is a highly competitive market |
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A restaurant is for sale for $200,00. It is estimated that the restaurant will earn 20,000, a year for the next 15 years. At end........ |
B. Investor would not pursue the project |
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The adjusted basis can be defined as |
A. Original cost + Capital Improvements - Accumulated Depreciation |
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Which of the following includes income from real estate classified as capital assets |
C. Portfolio Income |
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Which of the following is False regarding an expense stop? |
A. All operating expenses are covered by the stop Next Question: C. Expense stops can pass through expense savings to tenants |
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Which of the following is false regarding DCR? |
B. Is it not of concern to lenders when loan to value ratios are low C. minimum required DCR for laon - 1.2 |
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Financial leverage is defined as the benefits that may result to an investor by borrowing money at a rate of interest that is lower than the expected rate of return on total funds invested in a property |
True |
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One benefit of leverage is that it allows investors diversify across several investments One advantage of a sale leaseback is that the lease payments are 100% tax deductibe |
True/True |
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When the internal rate of return on an investment increases as the loan-to-value ratio increases, positive leverage exists |
True |
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In an inflationary environment where property values are also rising, a participation loan may provide a lender with some protection against unanticipated inflation |
True |
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An interest only loan will provide a higher debt coverage ratio than an amortizing loan with the same interest rate |
True |
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Properties with a higher ratio of debt are considered to also have a higher risk assuming everything else equal If a property owner borrows money at a rate that is higher than the equity yield rate, negative leverage exist |
True/True |
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What would be the break-even interest rate (BEIR) at which the use of leverage neither favorable nor unfavorable |
A. 15% |
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Under which conditions would one be most likely to see an interest rate sweep |
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 |
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A lender requires a 1.20 debt coverage ration as a minimum. If the net operating income of a property is 60,000, what is the maximum amount of debt service the lender would allow |
B. 50,000
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All other things being equal, which best describes the effects of leverage on all investments risk return characteristics |
C. Higher average return, higher risk |
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A property is financed with a 75% loan at 11.5% over 25 years..... |
A. Negative leverage exist |
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A property produces an 8.92% ATIRR on a total investment with a tax rate of 28%..... |
A. 12.39% |
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A loan in which the lender receives a percentage of the NOI from the property... |
A. Participation loan |
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A loan in which the lender has an option to purchase an equity interest in the property |
C. Convertible loan |
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Which of the following would not be considered an advantage that an investor might consider under a sale-leaseback of land |
D. The land may appreciate over the holding period |
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A lender requires a 1.20 debt coverage ratio as a minimum. An NOI of 45,000, what is the debt service |
B. 37,500 or lower |
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If a properly constructed and assuming everything but the structure of the interest payment is equal, which loan would have the highest debt service |
B. Conventional Loan |
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A property is financed with an 85% LTV at 10% over 25 years. What would the BTIRRE on equity be estimated at given that the BTIRRP is 10.75% |
C. 15% |
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Which of the following typically would not be used as a basis for a participation loan |
D. Potential Gross Income |
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Which of the following is not a benefit of a sale-leaseback of land for investors |
D. The land value may increase over the holding period |
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Which of the following is false regarding interest only loans |
B. They have great amortization than conventional loans |
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Which of the following gives the lender an option to purchase a full or partial interest in the property at the end of some specified period of time |
A. Convertible Loan |
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Which of the following is false regarding negative amortization |
C. It usually has a lower interest rate than a conventional loan |
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A bulletloan is a construction loan that, in effect, becomes permanent financing whenconstruction is complete Holdbacksare used by construction lenders to be sure that a developer has met all of hisor her obligations before all of the funds from the construction loan are givento the developer. |
True/True |
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The demand for retail space should be examined in terms of the characteristics of the tenants demand in a given market. |
True |
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Commitments for construction financing are usually contingent on commitments for permanent financing. |
True |
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Permanent financing commitments usually allow the lender to approve major leases. |
True |
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Generally,as the cost of a site increases, so do the quality and the density of the improvements constructed on it |
True |
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A standby commitment is |
B. An agreement by a lender to provide permanent financing for a property once construction is complete |
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Whichof the following is one reason that construction lenders typically prefer thecost approach to valuation over the income approach |
A. The cost approach provides a more conservative estimate of value |
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Whichof the following is the usual progression for a real estate development project? |
(B) Land acquisition, construction, completion, management, sale |
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Whichof the following is a “soft cost” of construction? |
(A) The cost of the architectural drawings |
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Permanentfunding commitments usually contain many funding contingencies. Which of the following typically is NOT oneof those contingencies? |
(A) Approval of all prospective leases |
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Mini-permloans usually refer to financing: |
(D) For construction, lease-up, and one or two subsequent years |
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TheMOST common method of distributing funds provided by a construction loan is a: |
(C) Series of payments throughout theconstruction project to reimburse the developer for costs incurred since theprevious payment |
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Incomparison to permanent financing, the rates and rate variability for aconstruction loan would be: |
B. High - Fluctuating |
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Intereston a construction loan is usually paid: |
(D) At the end of the loan |
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Besidesan estimate of costs, a construction loan submission package includes manyother components. Which of the followingis NOT one of those components? |
(A) Pro Forma Statement of Cash Flows for an investor’s portfolio |
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Inthe context of a lease, percentage rents generally indicate that |
(B) In addition to a base rent, the lessor willreceive a percentage of the tenant’s cash flow above some break even point |
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Whywould a developer be willing to manage a completed project even after it hasbeen sold? |
(D) All of the above |
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Whichof the following is NOT one of the developer strategies mentioned in thischapter? |
(A) To sell and lease back the land |
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Whichof the following is FALSE regarding a construction loan? |
A) Itusually has a lower rate than does permanent financing |
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Whichof the following common contingencies is usually included with a permanentfinancing agreement? |
(D) Cleanliness of work area |
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Whatterm applies to third-party financing that is used between funds advanced bythe permanent lender and funds needed to repay the construction loan? |
(C) Gap financing |
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Developersusually hold back about ___ percent of each progress payment. |
(B) 10 |
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The secondary mortgage market enables mortgage banking companies to sell existing mortgages and thereby replenish funds with which new loans can be originated. |
True |
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TheFederal Home Loan Mortgage Corporation’s (FHLMC) primary purpose is to provideliquidity for conventional mortgage originators just as FNMA and GNMA did fororiginators of FHA - VA mortgages Thestandard PSA prepayment curve assumes prepayments of 2% and 4% in years 1 and2, then 6% each year thereafter. |
True/ True |
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Amortgage pass-through security represents an undivided ownership interest in apool of mortgage held by a trustee Generally,prices for zero coupon mortgage-backed bonds are more sensitive to interestrate changes than interest bearing MBBs |
True/ True |
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Whichof the following is NOT a major type of mortgage-related securities? |
C. Americandepositary receipts (ADRs) |
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A25-year maturity mortgage-backed bond is issued. The bond has a par value of$10,000 and promises to pay an 8 percent annual coupon. At issue, bondmarket investors require a 12 percent interest rate on the bond. What is theinitial price on the bond? |
C. 6,683 C. 20 yr bond, 15 % - 7,653 |
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TheGovernment National Mortgage Association (GNMA) was organized to perform threeprincipal functions. Which of the followingis NOT a function of GNMA? |
(C) Manage all secondary mortgage market operations |
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Whichof the following statements regarding mortgage-backed bonds is generally TRUE? |
(C) Overcollateralization of the mortgage poolassures investors that the income from mortgage will be sufficient to pay theinterest on bonds and the principal upon maturity |
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Ceterisparibus, the more seasoned a mortgage is: |
(A) The greater the likelihood of prepayment |
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Thepass-through rate is the coupon rate of interest promised by the issuer of apass-through security to the investor. In most instances, the pass-through rate is |
(B) Lower than the lowest rate of interest on anymortgage in the underlying mortgage pool |
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Whichof the following is NOT a guarantee of Ginnie Mae (GNMA)? |
(C) All mortgages would be paid off atmaturity |
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Theprimary purpose of Freddie Mac (FHLMC) is to: |
(A) Provide a secondary market for mortgageoriginators |
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Whichof the following is FALSE regarding mortgage-backed bonds (MBBs): |
(B) Their maturity is indefinite at issuance |
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Whichof the following is NOT a risk listed for mortgage-backed securities? |
(C) Pass-through risk |
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Amortgage REIT is a REIT that primarily invests in mortgages rather than equityownership Fundsfrom operation (FFO), is calculated by adding back depreciation andamortization and other non-cash deductions to earnings. |
True/ True |
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MortgageREITs use debt financing to increase their capital bases. REITsare required to pay out 95 percent of their earnings as dividends. |
True
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Aportion of a REIT’s dividend may be a non-taxable return of capital. Realestate assets, cash, and government securities represent at least 75% of REITassets. |
True |
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Currently,MOST REITs are: |
A. (a)Equity trusts |
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Whichof the following regarding private (unlisted) REITs is TRUE? |
(b)Unlisted REITs are less liquid than listed REITS |
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Whichof the following is NOT a type of REIT? |
(D) Partnership trust |
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Ahybrid REIT is comprised of what primary classifications of REITs? |
(C) Mortgage, equity |
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Whichof the following is NOT a requirement of REITs? |
(D) All of the above are REIT requirements |
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Whichof the following REIT types is organized to acquire the specific property orproperties described in its prospectus? |
(D) An exchange trust |
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Whichof the following REIT types is NOT likely to own real property? |
(B) Mortgage REIT |
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Whichof the following is likely to occur upon the sale of a REIT-owned property? |
(A) If a capital gain is realized, the REIT canretain the gain for future investment and be taxed at the appropriate corporatecapital gains tax rate |
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Oncean entity has been terminated as a REIT, the entity cannot make a new electionto be taxed as a REIT until __ years after the termination. |
(D) 5 |
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REITdividends are considered ________ income and thus do not qualify as passiveincome to offset passive losses |
(A) Portfolio |
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Theearly growth of the REIT industry in the 1970s was mainly attributed to whichof the following? |
(A) Popularity of mortgage trusts |
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A borrower takes out a 30-year adjustable rate mortgageloan for $200,000 with monthly payments. The first two years of the loan have a“teaser” rate of 4%, after that, the rate can reset with a 2% annual rate cap. On the reset date, thecomposite rate is 5%. What would the Year 3 monthly payment be? (B) |
(b)$1,067 C - look for payment cap for similar question = $1,003 B - look for assuming negative amortization = $192,337 |
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Whichis NOT a component of an ARM? |
(C) A chapter |
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Ifan ARM index increased 15%, the negative amortization on a loan with a 5%annual payment cap is calculated by: |
(D) Compounding the difference between the paymentas if no cap existed and the 5% capped payments |
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If oneof the terms of an ARM read, interest is capped at 2%/5%, what would that mean? |
(B) The interest rate has a 2% annual cap rate and a 5% lifetime caprate |
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Underwhich scenario is negative amortization likely to occur? |
(C) 7.5% Increasing |
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For table questions |
1. lowest initial interest rate - A: Loan 1 2. Which of above is FRM - B: Loan 2 3. Lender have lowest risk - A: Loan 1 |
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Ahouse is for sale for $250,000. You havea choice of two 20-year mortgage loans with monthly payments: (1) if you make adown payment of $25,000, you can obtain a loan with a 6% rate of interest or(2) if you make a down payment of $50,000, you can obtain a loan with a 5% rateof interest. What is the effectiveannual rate of interest on the additional $25,000 borrowed on the first loan? |
(c)12.95% |
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Aborrower has secured a 30 year, $150,000 loan at 7% with monthly payments. Fifteen years later, the borrower has theopportunity to refinance with a fifteen year mortgage at 6%. However, the up front fees, which will bepaid in cash, are $2,500. What is thereturn on investment if the borrower expects to remain in the home for the nextfifteen years? |
(e) 28.89% |
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Aborrower has secured a 30 year, $150,000 loan at 7% with monthly payments. Fifteen years later, an investor wants topurchase the loan from the lender. Ifmarket interest rates are 5%, what would the investor be willing to pay for theloan? |
(c)$118,478 |
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Aborrower is purchasing a property for $180,000 and can choose between twopossible loan alternatives. The first isa 90% loan for 25 years at 9% interest and 1 point and the second is a 95% loanfor 25 years at 9.25% interest and 1 point. Assuming the loan will be held to maturity, what is the incremental costof borrowing the extra money? |
(A) 13.66% A. 13.95% |
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Whenpurchasing a $210,000 house, a borrower is comparing two loanalternatives. The first loan is a 90%loan at 10.5% for 25 years. The secondloan is an 85% loan for 9.75% over 15 years. Both have monthly payments and the property is expected to be held overthe life of the loan. What is theincremental cost of borrowing the extra money? |
(D) 12.42% |
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Aborrower made a mortgage loan 7 years ago for $160,000 at 10.25% interest for30 years. The loan balance is now$151,806.62 and rates for this amount are currently 9.0% for 23 years. Origination fees and closing costs are $4,500and closing costs are not financed by the lender. What is the effective cost of refinancing |
(D) 9.39% |
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Mr.Tramp made a mortgage 5 years ago for $85,000 at 8.25% interest and a 15 yearterm. Rates have now risen to 10% for anequivalent loan. Mr. Tramp’s lender iswilling to discount the loan by $2,000 if he will prepay the loan. What rate of return would Mr. Tramp receiveby prepaying the loan? |
(B) 8.95% |
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Aloan was made 10 years ago for $140,000 at 10.5% for a 30 year term. Rates are currently 9.25%. What is the market value of the loan? |
(C) $139,828 |
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Budis offering a house for sale for $180,000 with an assumable loan which was made5 years ago for $140,000 at 8.75% over 30 years. Kelsey is interested in buying the propertyand can make a $20,000 down payment. Asecond mortgage can be obtained for the balance at 12.5% for 25 years. What is the effective cost of the combinedloans, if Kelsey would like to compare this financing alternative to obtaininga first mortgage for the full amount? |
(B) 9.39% |
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Ahouse is sold with an assumable $156,000 below-market loan at 8.5% for aremaining term of 15 years. Currentrates are 9.75% for 15 year mortgages. If the house sold for $240,000, what is the cash-equivalent value of thehouse. |
(B) $229,165.18 |
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Ms.Madison has an existing loan with payments of $782.34. The interest rate on the loan is 10.5% andthe remaining loan term is 10 years. Thecurrent balance of the loan is $57,978.99. The home is now worth $120,000 and Ms. Madison would like to borrow anadditional $30,000 through a wraparound loan which would increase the debt to487,978.99. Terms of the wraparound loanare 12.25% interest with monthly payments for 10 years. What is the incremental cost of borrowing theextra $30,000 through a wraparound loan? |
(A) 15.47% |
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Mr.Fisher has built several houses and is offering buyers mortgage rates of 10%with 15 year term. Current rates are10.75%. Fourth National Bank willprovide the loans, if Mr. Fisher pays an equivalent amount up front to buy downthe interest rate. If a house is soldfor $290,000 with a 90% loan, how much would Mr. Fisher have to pay to buy downthe loan? |
(D) $10,790.41 |
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Considerthe table above. Assume that the subject property has effective gross income of$53,000 and a NOI of $27,500. What value would a GIM approach yield (rounded tothe nearest $100)? |
(c)$328,600 A - Cap Rate Approach: $322,600 |
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Considera building with a very long economic life. Assume at the end of year 6, NOIwill be $80,000 as is expected to grow at a rate of 2 percent per year.You company’s required rate of return is 12 percent. As part of youranalysis, you must calculate the reversion value (REV) at the end of year 5,which would be: ( |
(c)$800,000 |
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Considera property with NOI of $72,000 and a debt coverage ratio of 1.2 applied tofirst year NOI. What would be the estimated monthly mortgage payment? |
(a)$5,000 |
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Considerthe table above for a hypothetical income property that is under considerationfor purchase with a $455,000 loan. Using the principles of mortgage equitycapitalization, what is the estimated total property value (rounded to thenearest $100)? |
(d) $794,200 B - what is equity dividend rate: 3.5 percent |
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Giventhe following sales adjustment grid, what adjustment would be made for size? |
(C) $50 psf. |
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Aproperty is sold for $200,000. Typicalfinancing terms are an 85% loan with a 10% interest rate over 15 years. If the before-tax cash flow is $2,000, whatis the overall capitalization rate? |
(B) 11.96% |
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Aproperty produces a first-year net operating income of $24,000. Because of the long economic life of thebuilding, the income is considered as a perpetuity that will grow by 2.5% peryear. Using a discount rate of 9.5%, theproperty value is estimated at: |
(D) $342,857 |
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Aproperty is leased for $24,000 per year although market rents are currently$27,500 per year and are expected to increase by 2% per year. The property is expected to be sold at theend of year 10 based on a 10% terminal cap rate applied to the eleventh yearNOI. The current lease on the propertywill expire at the end of year 10 so the property can be leased in the eleventhyear at market rates. What is the valueof the leased fee estate based on an 11.5% discount rate? |
(C) $251,298 |
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Aproperty produces a first year NOI of $100,000 which is expected to grow by 2%per year. If the property is expected tobe sold in year 10, what is the expected sale price based on a terminalcapitalization rate of 9.5% applied to the eleventh year NOI? |
(C) $1,263,158 |
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Aproperty that produces a first year NOI of $80,000 is purchased for $750,000. The NOI is expected to increase by 15% in thesixth year when some of the leases turnover. The resale price in year 10 is expected to be $830,000. What is the net present value of the propertybased on the 10-year holding period and a discount rate of 9.5%? |
(D) $116,490 |
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Aproperty is purchase for $15 million. Financing is obtained at a 75% loan-to-value ration with total annualpayments of $1,179,000. The propertyproduces an NOI of $1,400,000. What isthe equity dividend rate (ratio of first year cash flow to equity)? |
(A) 5.89% |
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Aproperty that produces a level of NOI of $200,000 per year is expected to besold in year 5 for $2,000,000. If theproperty was purchased for $2,000,000, what percent of the IRR can beattributed to the operating income only? |
(C) 37.9% |
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Aproperty that produces an annual NOI of $100,000 was purchased for$1,200,000. Debt service for the yearwas $95,000 of which $93,400 was interest and the remainder was principal. Annual depreciation is $38,095. What is the taxable income? |
(C) - $31,495 |
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Aninvestor who has $75,000 in taxable income purchases a building that produces another$15,000 in taxable income. According tothe table below, what is the marginal tax rate? |
(B) 29.57% |
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Asmall office building is purchased of $1,200,000 with a balloon mortgage thatis due at the end of year 10. Paymentsare based on a 25 year amortization period. If one point was charged, what annual amount can be deducted for taxpurposes? |
(A) $1,200 |
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Aproperty is sold for $5,100,000 with selling costs of 3% of the salesprice. The mortgage balance at the timeof sale is $3,600,000. The property waspurchased 5 years ago for $4,820,000. Annual depreciation allowances of $153,016 have been taken. If the tax rate is 28%, what is the after-taxcash flow from sale of the property? |
(D) $1,097,218 |
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Aproperty produces an after tax internal rate of return of 12.24%. If the investor has a marginal tax rate of31%, what is the before-tax equivalent yield? |
(D) 17.74% |
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Aproperty produces an after tax internal rate of return of 12.24%. If the investor has a marginal tax rate of31%, what is the before-tax equivalent yield? |
(D) 17.74% |
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Whatwould be the break-even interest rate (BEIR), at which the use of leverageneither favorable nor unfavorable? |
(a)15.0% |
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1. A lender requires a 1.20 debt coverage ratio asa minimum. If the net operating incomeof a property is $60,000, what is the maximum amount of debt service the lenderwould allow? |
(b)$50,000 |
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Aproperty produces an 8.92% ATIRR on the total investment considering a tax rateof 28%. What is the maximum interestrate that could be paid on debt without causing the leverage to be negative? |
(A) 12.39% |
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Aproperty is financed with an 85% loan-to-value ratio at 10% interest over 25years. What would the BTIRRE on equity beestimated at given that the BTIRRP is 10.75%? |
(C) 15.0% |
