REAL ESTATE FINANCE AND INVESTMENT 17TH EDITION WILLIAM BRUEGGEMAN AND JEFFREY FISHER TEST BANK

REAL ESTATE FINANCE AND INVESTMENT 17TH EDITION WILLIAM BRUEGGEMAN AND JEFFREY FISHER TEST BANK Chapter 1-23 Answers are at the End of Each Chapter Chapter 1

Student name: 1) If a lender is to repossess or bring about the sale of a property if the borrower defaults on the mortgage loan, the lender is said to have a in the real estate.

A) B) C) D)

freehold interest lease interest secured interest quitclaim

2) A(n) estate represents the most complete form of ownership of real estate; the owner is free to divide it up into lesser estates and sell, lease, or borrow against them as he or she wishes.

A) B) C) D)

fee simple freehold leasehold life

3) Mr. Smith has allowed Mrs. Jones to run a sewer line through Mr. Smith's backyard so that Mrs. Jones has access to the city sewer system. This is an example of a(n): A) B) C) D)

easement. encumbrance. estate for years. title assurance.

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4)

Which type of deed offers the grantee the MOST protection?

A) B) C) D)

Quitclaim deed Special warranty deed General warranty deed Officer's deed

5) What term BEST describes a person that owns a property and is conveying title to the property to another person?

A) B) C) D)

6)

What type of estate lasts for an indefinite period of time?

A) B) C) D)

7)

Freehold estate Estate from year-to-year Leasehold estate Estate for years

Which of the following is NOT a good method of title assurance?

A) B) C) D)

8)

Mortgagor Grantor Mortgagee Grantee

Seller provides a warranty in the deed An attorney searches recorded documents Title insurance is purchased Seller provides a quitclaim deed

What legal document conveys title from one person to another?

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A) B) C) D)

Mortgage Note Deed Title

9) A historical summary of the publicly-recorded documents that affect the ownership of a property is known as a(n): A) B) C) D)

10)

estate. deed. abstract of title. lien.

Which of the following is FALSE regarding a tax sale?

A) An accurate and complete description of the property is required to be posted for possible purchasers before the sale.

B) The property owner may not have had a court appearance through due process, thus creating a cloud on the title.

C) The line of authority for the sale may not be clear.

D) The purchaser is usually expected to pay all delinquent taxes at the time of sale.

11)

A reversion and a remainder are similar in that: A) B) C) D)

both can be sold or mortgaged. both cause the property to go back to the grantor after the sale. neither is an actual interest in the property. neither is considered a future estate.

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12)

Which of the following is FALSE concerning mechanic's Liens?

A) B) C) D)

Gives the right to attach a lien on real estate Can get money through forcing judicial sale Lasts even after the bill for labor and materials has been paid Might not be disclosed by the public records

13) All other items not considered realty, including intangibles and movable things, are considered as: A) B) C) D)

14)

realty. contractual. personality. an estate.

A term used to link an individual or entity who owns property to the property itself is: A) B) C) D)

easement. title. deed. lease.

15)

Real estate refers to the physical land and improvements constructed on the land. ⊚ true ⊚ false

16)

Real property refers to the ownership rights associated with real estate. ⊚ true ⊚ false

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17) A quitclaim deed says that the grantor "quits" whatever claim he has in the property in favor of the grantee. ⊚ true ⊚ false

18)

It is illegal to give a quitclaim deed if the grantor has no claim in the property. ⊚ true ⊚ false

19) The term real estate refers to the ownership rights associated with the physical land and improvements. ⊚ true ⊚ false

20)

A fee simple estate is a type of freehold estate. ⊚ true ⊚ false

21) As compared to other types of deeds, a general warranty deed provides the most comprehensive warranties about the quality of the title to the property. ⊚ true ⊚ false

22) After a house is purchased, contractors cannot ask the new owner of the house to pay any bills that were outstanding before the house was sold. ⊚ true ⊚ false 5

23) A reciprocal easement agreement allows two or more parties to access each other's property. ⊚ true ⊚ false

24) A lien waiver provides certification that contractor's on newly constructed properties have been compensated. ⊚ true ⊚ false

25)

A lessee is a person who holds the title to a piece of property. ⊚ true ⊚ false

26)

The grantee typically conveys title to the grantor by means of a deed. ⊚ true ⊚ false

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Answer Key Test name: chapter 1 1) C 2) A 3) A 4) C 5) B 6) A 7) D 8) C 9) C 10) A 11) A 12) C 13) C 14) B 15) TRUE 16) TRUE 17) TRUE 18) FALSE 19) FALSE 20) TRUE 21) TRUE 22) FALSE 23) TRUE 24) TRUE 25) FALSE 26) FALSE 7

Student name: 1) A loan in which the borrower arranges in advance with a mortgagee for a total amount that will be advanced, in stages, under the mortgage to meet the part of the costs of construction as it progresses is a(n): A) B) C) D)

2)

assumption of the mortgage. nonrecourse mortgage. open-end mortgage. subordination of the mortgage.

A "short sale" of real estate is:

A) a sale that closes in less than 30 days.

B) the sale of a house by someone who is not the owner; it is a way to profit from an anticipated decline in real estate prices.

C) a sale in which the proceeds from the sale are less than the balance owed on the loan secured by the property sold.

D) a sale in which the balance owed on the loan secured by the property sold is less than the proceeds from the sale.

3) Which of the following situations is NOT a common cause for the use of a purchasemoney 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 or unavailable.

D) The seller desires to artificially raise the price of the property by receiving a higherthan-market interest rate.

4)

Which of the following is NOT a minimum mortgage requirement?

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A) B) C) D)

5)

Description of the property Covenant of warranty Prepayment clause Covenant of seizin

A mortgage is BEST defined as a legal document that: A) B) C) D)

creates an obligation to repay a loan under specific terms. names real estate as the security or collateral for the repayment of a loan. defines a possessory interest in real estate. conveys ownership of a property to its purchaser.

6) Which of the following solutions is LEAST likely to be acceptable to a mortgagee when discussing alternatives to foreclosing a property?

A) B) C) D)

Permanently extending the amortization period Finding someone else to assume the mortgage Providing a temporary grace period during which principal and interest are not paid Permanently reducing the interest rate

7) Which of the following terms refers to an owner’s right to redeem a property after foreclosure?

A) B) C) D)

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Equity of redemption Statutory redemption Attachment Execution

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8) In jurisdictions where a deed of trust is used to finance real estate, there are three parties to the loan secured by the deed of trust. Which of the following is NOT one of those three parties?

A) B) C) D)

Borrower Trustee Holder of the note Grantor

9) A senior mortgage holder is owed a mortgage balance of $140,000 and brings a foreclosure suit which includes all junior claimants in the suit. If the senior mortgage holder purchases the property for $140,000 at the foreclosure sale, what happens to the claim of the junior claimants?

A) The liens of the junior claimants are unaffected and the debt is due upon sale.

B) The liens of the junior claimants are extinguished, but the debt owed to the junior claimants is unaffected.

C) The liens of the junior claimants and the debt owed to them are extinguished.

D) The liens of the junior claimants are unaffected, but the debt owed to them is extinguished.

10) A property is encumbered as follows: First mortgage, A: $250,000 Second mortgage, B: $40,000 Third mortgage, C: $10,000 How much can mortgagee B pay for the property at a foreclosure sale without having to raise additional funds?

A) $290,000 B) $40,000 C) $300,000 D) $50,000

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11) Which of the following types of bankruptcy is filed with the end result of liquidating the debtor’s assets?

A) B) C) D)

Chapter 7 Chapter 11 Chapter 13 Chapter 17

12) Which of the following types of bankruptcy is available to a business to reorganize and rehabilitate the debtor?

A) B) C) D)

13)

Chapter 7 Chapter 11 Chapter 13 Chapter 17

A mortgage agreement provides the lender with A) B) C) D)

interests.

unsecured secured nonpossessory possessory

14) What is usually executed at the same time as a mortgage and creates the obligation to repay the loan in accordance with its terms?

A) B) C) D)

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Recording acts Ownership interests Method of payment Promissory note

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15) Which of the following gives the lender the right or option to demand the loan balance owed if a default occurs?

A) B) C) D)

16)

Which of the following is NOT an alternative to foreclosure?

A) B) C) D)

17)

Restructuring the mortgage loan Transfer of the mortgage to a new owner Redemption Prepackaged bankruptcy

Which of the following types of default LEAST often results in foreclosure?

A) B) C) D)

18)

Nonrecourse clause Assignment clause Acceleration clause Default clause

Failure to fulfill financial obligation Failure to pay taxes Failure to pay insurance premiums when due Failure to keep the security in repair

Which of the following statements is FALSE regarding foreclosure?

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A) In judicial foreclosure, property subject to attachment and execution is limited to the mortgaged property.

B) If the sale of the mortgaged property realizes a price above the claims of the mortgage and expense of the sale, the balance goes to the mortgagor.

C) Redemption can be accomplished by paying the full amount of the debt, interest, and costs due to mortgage.

D) The purchaser of property at a foreclosure sale is, in effect, the purchaser of the rights of the mortgagor whose interests are cut off by the sale.

19)

When would seller financing NOT be 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 lowerthan-market interest rate on the mortgage.

20) A situation in which a borrower agrees to a court's jurisdiction and cooperates with the lender during litigation to resolve the situation is: A) B) C) D)

prepackaged bankruptcy. judicial foreclosure. friendly foreclosure. voluntary conveyance.

21) A transaction in which a borrower sells a property for less than the current balance of the loan and then provides all of the proceeds to the sale to the lender, typically in full satisfaction of the loan is:

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A) B) C) D)

prepackaged bankruptcy. short sale. judicial foreclosure. friendly foreclosure.

22) What term BEST describes the borrower who is personally liable for a debt obligation related to the purchase of a home?

A) B) C) D)

Mortgagor Grantor Mortgagee Grantee

23) The term to describe a piece of tangible personal property that is affixed to a property, such that it may be considered part of the property?

A) B) C) D)

Cramdown Workout Redemption Chattel

24) Which of the following documents conveys title to a property at the time the purchaser completes the performance of the obligation called for in the document?

A) B) C) D)

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Junior mortgage Package mortgage Purchase-money mortgage Land contract

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25)

A mortgage is the same thing as a note. ⊚ true ⊚ false

26) A nonrecourse loan is one in which the borrower is personally liable for payment of all amounts due under the terms of the note. ⊚ true ⊚ false

27)

Prepayment of a loan without penalty is a right of all borrowers. ⊚ true ⊚ false

28) A second mortgage is a junior lien mortgage that is sometimes used to bridge the gap between the price of a property and the sum of the first mortgage and down payment. ⊚ true ⊚ false

29)

A remainder cannot be mortgaged. ⊚ true ⊚ false

30) A clause which specifies that the mortgagor will pay all property taxes and other charges assessed against the property, even if these charges have priority over the mortgage, is typically included in a mortgage. ⊚ true ⊚ false

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31) A clause which specifies that the mortgagee will obtain and maintain personal property insurance is typically included in a mortgage. ⊚ true ⊚ false

32) Under lien theory, title and the right to possession pass from the mortgagor to the mortgagee when the mortgage is executed. ⊚ true ⊚ false

33) A due on sale clause which specifies that the mortgage can accelerate the debt if the property is sold without the mortgagee’s permission is a typical clause in a mortgage document. ⊚ true ⊚ false

34)

It is a federal law that a mortgage must be recorded to be valid. ⊚ true ⊚ false

35)

A mortgage default can result from failure to pay property taxes. ⊚ true ⊚ false

36)

A technical default can result from failure to keep the property in repair. ⊚ true ⊚ false

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37) When a purchaser takes a property "subject to" an existing mortgage, the purchaser becomes personally liable for repaying the debt. ⊚ true ⊚ false

38) When a deed is given in lieu of foreclosure of the mortgage, the mortgagor no longer has an obligation to pay the mortgage note. ⊚ true ⊚ false

39)

Junior liens are eliminated by a voluntary conveyance of a property to the mortgagee. ⊚ true ⊚ false

40) If a property encumbered by a mortgage is sold at a foreclosure sale for an amount more than the value of the mortgage, the mortgagor is not obligated to pay the mortgagee the remaining balance. ⊚ true ⊚ false

41) A purchaser at a tax sale receives a deed to the property at the time of the sale in nearly all states. ⊚ true ⊚ false

42) The process of confirming a plan of reorganization under Chapter 11 bankruptcy, even if one or more creditor classes dissent, is known as a "cramdown." ⊚ true ⊚ false

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43) If a debtor, under Chapter 7 bankruptcy, is not behind on his mortgage payments, he does not have to give up the property. ⊚ true ⊚ false

44) Unless stated otherwise, the borrower is personally liable for payment of all amounts due under the terms of the note. ⊚ true ⊚ false

45)

A short sale occurs when a buyer does not bring adequate funds to a mortgage closing. ⊚ true ⊚ false

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Answer Key Test name: chapter 2 1) C 2) C 3) D 4) C 5) B 6) D 7) B 8) D 9) B 10) A 11) A 12) B 13) B 14) D 15) C 16) C 17) D 18) B 19) C 20) C 21) B 22) A 23) D 24) D 25) FALSE 26) FALSE Version 1

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27) FALSE 28) TRUE 29) FALSE 30) TRUE 31) FALSE 32) FALSE 33) TRUE 34) FALSE 35) TRUE 36) TRUE 37) FALSE 38) TRUE 39) FALSE 40) FALSE 41) FALSE 42) TRUE 43) TRUE 44) TRUE 45) FALSE Student name: 1) If you deposit $1,000 in an account that earns 5 percent per year (compounded monthly), what will the balance in the account be at the end of 5 years?

A) $1,272 B) $1,276 C) $1,280 D) $1,283

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2) Ten years ago, you put $150,000 into an interest-earning account. Today it is worth $275,000. What is the effective annual interest earned on the account?

A) 47.99% B) 6.00% C) 6.25% D) 8.33%

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 percent 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) $0—it would be impossible to earn 20 percent interest on the loan.

4) A deposit placed in an interest-earning account earning 8 percent a year will double in value in years.

A) B) C) D)

6 8 9 72

5) At the end of 8 years, your friend wants to have $50,000 saved for a down payment on a house. He expects to earn 8 percent (compounded monthly) on his investments over the next 8 years. How much would your friend have to put in his investment account each month to reach his goal?

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A) $188 B) $374 C) $392 D) $521

6) Your friend just won the lottery. He has a choice of receiving $50,000 a year for the next 20 years or a lump sum today. The lottery uses a 15 percent discount rate. What would be the lump sum amount your friend would receive?

A) $312,967 B) $316,426 C) $500,000 D) $1,000,000

7) The future value of a single deposit of $1,000 will be greatest when this amount is compounded: A) B) C) D)

annually semi-annually quarterly monthly

8) The future value of $1,000 compounded annually for 8 years at 12 percent may be calculated with the following formula: FV = $1,000 * (1 + 12%)8 If the same $1,000 was compounded quarterly, what formula would you use to calculate the FV?

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A) FV = $1,000 * (1 + 3%)8 B) FV = $1,000 * (1 + 12%)32 C) FV = $1,000 * (1 + 3%)32 D) FV = $1,000 * (1 + 12%)2

9) If you saw a table containing the following factors, what kind of interest factor would you be looking at?

End of Year 1 2 3 4 5

A) B) C) D)

6% 1.06000 1.12360 1.19102 1.26248 1.33823

Present value of a single amount Future value of a single amount Present value of an annuity Future value of an annuity

10) Begin with a single sum of money at Period 0. First, calculate a future value of that sum at 12.01 percent. Then discount that future value back to Period 0 at 11.99 percent. In relation to the initial single sum, the discounted future value: A) B) C) D)

11)

is greater than the original amount. is less than the original amount. is the same as the original amount. cannot be determined with the information given.

The future value compound factor given for period (n) at 15 percent:

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A) B) C) D)

12)

Which of the following is not a basic component of any compounding problem?

A) B) C) D)

13)

would be less than the factor for period (n + 1) at 15 percent. would be greater than the factor given for period (n + 1) at 15 percent. would be the same as the factor given for period (n + 1) at 15 percent. bears no relationship to the factor for period (n + 1) at 15percent.

An initial deposit An interest rate A period of time A net present value

If an investment earns 12 percent 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 relationship cannot be determined between a monthly and annual investment.

14)

The internal rate of return:

A) is also known as the investment of investor's yield.

B) represents a return on investment expressed as a compound rate of interest.

C) is calculated by setting the price of an investment equal to the stream of cash flows it generates and solving for the interest rate.

D) can be defined by all of the choices.

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15) Using only the information in the table below, what would the IRR be for an investment that cost $500 in period 0 and was sold for $750 in period 5?

Present Value Factor for Reversion of $1 Period 1 2 3 4 5 6

A) B) C) D)

6%

7%

8%

9%

10%

0.943396 0.889996 0.839619 0.792094 0.747258 0.704961

0.934579 0.873439 0.816298 0.762895 0.712986 0.666342

0.925926 0.857339 0.793832 0.735030 0.680583 0.630170

0.917431 0.841680 0.772183 0.708425 0.649931 0.596267

0.909091 0.826446 0.751315 0.683013 0.620921 0.564474

Between 6% and 7% Between 7% and 8% Between 8% and 9% Between 9% and 10%

16) Using only the information in the table below, approximately how much would you pay today for an investment that pays $0 annual interest, but earns 8 percent interest over the next four years and has a face value at maturity of $13,500?

Present Value Factor for Reversion of $1 Period 1 2 3 4 5 6

6% 0.943396 0.889996 0.839619 0.792094 0.747258 0.704961

7% 0.934579 0.873439 0.816298 0.762895 0.712986 0.666342

8% 0.925926 0.857339 0.793832 0.735030 0.680583 0.630170

9% 0.917431 0.841680 0.772183 0.708425 0.644931 0.596267

10% 0.909091 0.826446 0.751315 0.683013 0.620921 0.564474

A) $8,000 B) $9,000 C) $10,000 D) $11,000

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17)

A series of equal, annual cash flows that are received at the end of each period is a(n): A) B) C) D)

ordinary annuity. annuity due. regular annuity. ordinary annuity due.

18) An investment that costs $105,000 today is expected to produce the following cash inflows over each of the next five years: $20,000; $25,000; $23,000; $22,000; $21,000. What is the IRR (compounded annually) for this investment?

A) 188.6% B) 18.9% C) 1.89% D) −18.9%

19) If Beth makes an initial investment of $1,000, how much will it be worth after three years if her average return is 8.25 percent (compounded monthly)?

A) $1,268.48 B) $17,354.20 C) $1,279.74 D) $1,020.77

20) For situations calling for other than annual compounding, each of these factors (when present) must be adjusted for the number of compounding periods in a year: A) B) C) D)

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PV and FV. N and i.

N, i, and PMT. N, i, PV, and PMT.

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21) How much money does Ted need to invest each month in order to accumulate $10,000 over a five-year period, if he expects to get a return of 5.625 percent per year?

A) $144.71 B) $1,787.30 C) $148.94 D) $146.36

22) In a compounding problem, you must know all four of the variables to solve for the fifth variable. ⊚ true ⊚ false

23) One way to calculate the present value of a single payment is with the following formula: PV = FV * (1 + i)n. ⊚ true ⊚ false

24) Assuming an interest rate of 6 percent, the present value of $1 that will be received a year from now is $.75. ⊚ true ⊚ false

25) The future value of $800 deposited today would be greater if that deposit earned 8 percent rather than 7.75 percent. ⊚ true ⊚ false

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26) due.

In business, you see the use of an ordinary annuity and never see the use of an annuity ⊚ ⊚

true false

27) The internal rate of return is the good feeling you get inside when you earn a return on your investment. ⊚ true ⊚ false

28)

An investment may have more than one internal rate of return. ⊚ true ⊚ false

29) Assume that an investment, with a single initial cost of $1,000 and a yield of $50 monthly for 10 years, had a 7 percent IRR in the 60th month and a 7.2 percent IRR five months later. The IRR can be 6.8 percent in the 62nd month. ⊚ true ⊚ false

30) The future value of a $1 annuity compounded at 5 percent annually is greater than the future value of a $1 annuity compounded at 5 percent semiannually. ⊚ true ⊚ false

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Answer Key Test name: chapter 3 1) D 2) C 3) A 4) C 5) B 6) A 7) D 8) C 9) B 10) A 11) A 12) D 13) B 14) D 15) C 16) C 17) A 18) C 19) C 20) C 21) A 22) TRUE 23) FALSE 24) FALSE 25) TRUE 26) FALSE Version 1

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27) FALSE 28) TRUE 29) FALSE 30) FALSE Student name: 1) A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5 percent. What would the monthly payment be?

A) $694 B) $1,042 C) $1,342 D) $1,355

2) A borrower takes out a 30-year mortgage loan for $250,000 with an interest rate of 5 percent 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

3) A borrower has a 30-year mortgage loan for $200,000 with an interest rate of 6 percent and monthly payments. If she wants to pay off the loan after 8 years, what would be the outstanding balance on the loan?

A) $84,886 B) $91,246 C) $146,667 D) $175,545

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4) A borrower takes out a 30-year mortgage loan for $100,000 with an interest rate of 6 percent plus 4 points. What is the effective annual interest rate on the loan if the loan is carried for all 30 years?

A) 5.6% B) 6.0% C) 6.4% D) 6.6%

5) A borrower obtains a $150,000 reverse mortgage with monthly payments over 10 years.

If the interest rate of the mortgage loan is 8% percent what is the monthly payment received by the borrower?

A) $820 B) $863 C) $1,250 D) $1,820

6) Which of the following is NOT a determinant of interest rates for single family residential mortgages?

A) B) C) D)

The demand and supply of mortgage funds Inflation expectations Liquidity The demand and supply of apartments

7) Risk is an important component of interest rates. Which of the following risks is NOT a determinant of interest rates?

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A) B) C) D)

Default risks Interest rate risks Institutional risks Marketability risks

8) One of the first amortizing mortgages was the constant amortization mortgage (CAM).

Which of the following characterized the components of the CAM payment over the life of the loan?

Interest (A) (B) (C) (D)

Decreasing Constant Decreasing Constant

A) B) C) D)

Amortization Decreasing Decreasing Constant Constant

Payment Decreasing Decreasing Decreasing Constant

Option A Option B Option C Option D

9) One of the most popular amortizing mortgages today is the constant payment mortgage (CPM). Which of the following characterizes the components of the CPM payment over the life of the loan?

Interest (A) (B) (C) (D)

Decreasing Increasing Decreasing Constant

A) B) C) D)

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Amortization Decreasing Decreasing Increasing Constant

Payment Decreasing Constant Constant Constant

Option A Option B Option C Option D

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10) In comparison to the first month’s payment of a CAM, the first month’s payment of a CPM: A) B) C) D)

11) the:

At the end of five years, calculating the loan balance of a constant payment mortgage is

A) B) C) D)

12)

is higher. is lower. is the same. cannot be determined with this information.

present value of a single amount. future value of a single amount. present value of an ordinary annuity. future value of an annuity due.

Which of the following closing costs DO NOT increase the lender’s effective loan yield?

A) B) C) D)

Discount points Prepayment penalties Title insurance charges Origination fees

13) Which mortgage would a borrower prefer to have during inflationary and recessionary periods?

Inflationary (A) (B) (C) (D)

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CPM GPM CPM CPM

Inflationary GPM CAM CAM GPM

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A) B) C) D)

A B C D

14) Over the life of the loan, which of the following loans would continually have a lower principal balance given each loan had the same term, principal amount, and average interest rate?

A) B) C) D)

CAM CPM GPM GAM

15) Because its payment stream looks like a staircase, which loan is sometimes referred to as "stepped-up" financing due to prearranged payment increases?

A) B) C) D)

16)

Demand for a mortgage loan is considered: A) B) C) D)

17)

CAM CPM GPM ARM

stable demand derived demand interest rate demand nominal demand

Points are also known as:

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A) B) C) D)

18)

APR stands for which of the following?

A) B) C) D)

19)

Annual percentage rate Amortized percentage regulator Accrued percentage rate Annual percentage regulator

Assuming a constant APR the effective interest rate on a loan is highest when: A) B) C) D)

20)

third party charges. reduction in payment amount. loan discount fees. reduction of mortgage yield.

the loan has no points and a 30-year maturity and is prepaid in five years. the loan has no points and is prepaid at maturity. points are charged and the loan is paid off at maturity in 30 years. points are charged and the loan has a 30-year maturity but is prepaid in five years.

Which one of the following is TRUE about prepayment penalties?

A) B) C) D)

They are never used with residential mortgages.

They lower the effective cost if the loan is repaid before maturity.

They are equivalent to charging additional points for the loan.

They are not included in the APR calculation.

21) If a fully amortizing 30-year fixed rate mortgage was originally taken at $200,000 with 5.25 percent interest, but now has a balance of $50,385, how many more monthly payments will it take before it will be paid off?

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A) B) C) D)

45 months 51 months 55 months 90 months

22) What is the principal portion of the 222 payments of a fully amortizing $250,000, 30-year fixed rate loan with an interest rate of 4.825 percent?

A) $562.38 B) $565.29 C) $753.07 D) $1,315.44

23) What is the annual interest rate of a fully amortizing 20-year fixed rate $175,000 mortgage, with a monthly payment of $1,266.41?

A) 5.10% B) 6.125% C) 6.25% D) 6.375%

24)

Inflation makes very little difference to lenders of and investors needing money. ⊚ true ⊚ false

25)

Lenders and investors worry about default, interest rate, marketability, and liquidity risks. ⊚ true ⊚ false

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26) One difference between the constant amortizing mortgage (CAM) and the constant payment mortgage (CPM) is the interest paid and loan amortization relationship. With a CAM, the loan amortization and interest paid are directly related and with the CPM the loan amortization and the interest paid are inversely related. ⊚ true ⊚ false

27)

Determining a loan balance on a CPM is a simple present value of an annuity problem. ⊚ true ⊚ false

28) loan.

The effective interest rate on a mortgage will always be higher than the stated rate of the ⊚ ⊚

true false

29)

Truth-in-lending requires the borrower to tell the truth on the loan application. ⊚ true ⊚ false

30)

The annual percentage rate closely approximates the borrower's true cost of funds. ⊚ true ⊚ false

31) it.

Prepayment penalties increase the lender’s mortgage yield and discount points decrease

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⊚ ⊚

32)

true false

Origination fees are tax deductible as an interest expense. ⊚ true ⊚ false

33) Graduated payment mortgages (GPMs) are loans available to people who have graduated from college. ⊚ true ⊚ false

34) Borrowers with fixed rate mortgages generally benefit if actual inflation is higher than expected inflation. ⊚ true ⊚ false

35)

The APR for a loan assumes it is prepaid after ten years. ⊚ true ⊚ false

36)

With a reverse mortgage the borrower receives payments from the bank. ⊚ true ⊚ false

37) A reverse mortgage can be a good option for first-time homebuyers who cannot make a substantial down payment.

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⊚ ⊚

true false

38) With a negative amortizing loan, the borrower will end up with a loan balance at the end of the loan that is greater than the original loan balance. ⊚ true ⊚ false

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Answer Key Test name: chapter 4 1) C 2) B 3) D 4) C 5) A 6) D 7) C 8) C 9) C 10) B 11) C 12) C 13) C 14) A 15) C 16) B 17) C 18) A 19) D 20) D 21) B 22) C 23) B 24) FALSE 25) TRUE 26) TRUE Version 1

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27) TRUE 28) FALSE 29) FALSE 30) FALSE 31) FALSE 32) FALSE 33) FALSE 34) TRUE 35) FALSE 36) TRUE 37) FALSE 38) TRUE Student name: 1) A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments. The first two years of the loan have a "teaser" rate of 4 percent, after that the rate can reset with a 2 percent annual rate cap. On the reset date, the composite rate is 5 percent. What would the Year 3 monthly payment be?

A) $955 B) $1,067 C) $1,071 D) $1,186

2) A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments. The first two years of the loan have a "teaser" rate of 4 percent, after that the rate can reset with a 5 percent annual payment cap. On the reset date, the composite rate is 6 percent.

What would the Year 3 monthly payment be?

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A) $955 B) $1,067 C) $1,003 D) $1,186

3) A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments. The first two years of the loan have a "teaser" rate of 4 percent, after that the rate can reset with a 5 percent annual payment cap. On the reset date, the composite rate is 6 percent.

Assume that the loan allows for negative amortization. What would be the outstanding balance on the loan at the end of Year 3?

A) $190,074 B) $192,337 C) $192,812 D) $192,926

4)

Which is NOT a component of an ARM? A) B) C) D)

A margin An index A chapter Caps

5) Which of the following descriptions most accurately reflects the risk position of an ARM lender in comparison to that of an FRM lender?

(A) (B) (C) (D)

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Interest Rate Risk Higher Lower Higher Lower

Default Risk Higher Lower Lower Higher

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A) B) C) D)

Option A Option B Option C Option D

6) LOAN 1 Initial Interest Rate Loan Maturity (years) % Margin Above Index Adjustment Interval Points Interest Rate Cap

?

20 3% 1 year 1% NONE

LOAN 2 ?

20 — — 1% —

LOAN 3

LOAN 4

?

20 3% 1 year 1% 1%/year

?

20 3% 1 year 1% 3%/year

Which loan in the above table should have the lowest initial interest rate?

A) B) C) D)

Loan 1 Loan 2 Loan 3 Loan 4

7) LOAN 1 Initial Interest Rate Loan Maturity (years) % Margin Above Index Adjustment Interval Points Interest Rate Cap

?

20 3% 1 year 1% NONE

LOAN 2 ?

20 — — 1% —

LOAN 3

LOAN 4

?

20 3% 1 year 1% 1%/year

?

20 3% 1 year 1% 3%/year

Which loan in the above table is an FRM?

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A) B) C) D)

Loan 1 Loan 2 Loan 3 Loan 4

8) LOAN 1 Initial Interest Rate Loan Maturity (years) % Margin Above Index Adjustment Interval Points Interest Rate Cap

?

20 3% 1 year 1% NONE

LOAN 2 ?

20 — — 1% —

LOAN 3

LOAN 4

?

20 3% 1 year 1% 1%/year

?

20 3% 1 year 1% 3%/year

With which loan in the above table does the lender have the lowest interest rate risk?

A) B) C) D)

9)

Loan 1 Loan 2 Loan 3 Loan 4

Under which scenario is negative amortization likely to occur?

Payment Cap None None 7.5% 7.5%

(A) (B) (C) (D)

A) B) C) D)

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Interest Rates Increasing Decreasing Increasing Decreasing

Option A Option B Option C Option D

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10)

In order to calculate the APR for an ARM, you must:

A) only use the first year’s given interest rate.

B) estimate interest rates over the life of the loan.

C) assume the worst case scenario and use interest rates at their highest possible point over the life of the loan.

D) use only the first five years' interest rates because they can easily be estimated and most people only own a property for five years.

11) If an ARM index increased 15 percent, the negative amortization on a loan with a 5 percent annual payment cap is calculated by:

A) using the same payment as last year and deducting 5 percent from the principal balance.

B) increasing the payment by 5 percent.

C) totaling the difference between the payments with the 5 percent capped payment.

D) compounding the difference between the payments as if no cap existed and with the 5 percent capped payment.

12) If one of the terms of an ARM read “interest is capped at 2%/5%”, what would that mean?

A) B) C) D)

13)

The borrower can choose the cap he wants by circling the appropriate choice.

The interest rate has a 2 percent annual cap rate and a 5 percent lifetime cap rate.

The interest rate has a 5 percent annual cap rate and a 2 percent lifetime cap rate.

The interest rate has a 2 percent annual cap rate and a 5 percent floor cap rate.

Which of the following is a disadvantage of PLAMs?

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A) Lenders face high levels of interest rate risk under PLAMs. B) Fewer homebuyers are likely to qualify for financing using PLAMs in comparison to CPMs. C) The price level used to index PLAMs is measured on an ex post basis and historic prices may not be an accurate reflection of future price.

D) All of the choices are disadvantages.

14)

Which of the following clauses leads to higher risk for an ARMs lender?

A) Negative amortization is not allowed when interest is not covered by the payment due to a payment cap.

B) There is a floor for payments.

C) The adjustment interval is longer than one year.

D) All of the clauses lead to higher risk for an ARMs lender.

15)

The expected cost of borrowing depends on which of the following provisions?

A) B) C) D)

The frequency of payment adjustments The inclusions of caps and floors on the interest rate, payment, or loan balances The spread over the index chosen for a given ARM All of the choices are correct.

16) Given that every other factor is equal, which of the following ARMs will have the lowest expected cost?

A) B) C) D)

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An ARM with payment caps and negative amortization An ARM with interest rate caps An ARM with a longer adjustment interval An ARM with no caps or limitations

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17)

What is the meaning of “interest is capped at 2%/5%”?

A) B) C) D)

The loan has a 2 percent annual cap rate and a 5 percent lifetime cap rate.

The borrower can choose the cap he wants by circling the appropriate choice.

The loan has a 2 percent lifetime cap rate and a 5 percent annual cap rate.

The loan has a 2 percent annual cap rate and a 5 percent floor cap rate.

18) A borrower takes a 30-year fully amortizing 5/1 ARM for $225,000 with an initial interest rate of 4.375 percent. Assuming the index on which the loan rate is based rises by 1 percent in the fourth year of the loan and remains at that level, what will the payment be in the sixth year of loan?

A) $1,123.39 B) $1,241.89 C) $1,259.94 D) $1,403.71

19) ARMs were developed because lenders were tired of offering a limited selection of loan alternatives to borrowers. ⊚ true ⊚ false

20) ARMs help lenders combat unanticipated inflation changes, interest rate changes, and a maturity gap. ⊚ true ⊚ false

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21) Characteristics of a PLAM include an increasing mortgage payment and an adjusting loan balance tied to an index. ⊚ true ⊚ false

22) A major benefit of a PLAM is that the mortgage payment increases are tied to increases in the borrower’s salary. ⊚ true ⊚ false

23)

PLAMs have been very popular with lenders. ⊚ true ⊚ false

24) Lenders can partially avoid estimating interest rates by tying an ARM to an interest rate index. ⊚ true ⊚ false

25)

Negative amortization reduces the principal balance of a loan. ⊚ true ⊚ false

26)

The floor of an ARM is the maximum reduction of payments or interest rates allowed. ⊚ true ⊚ false

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27)

ARMs eliminate all the lender’s interest rate risk. ⊚ true ⊚ false

28)

The default risk of an FRM is higher than the default risk of an ARM. ⊚ true ⊚ false

29)

An ARM may also be referred to as a floating payment loan. ⊚ true ⊚ false

30) A borrower with an interest-only loan may end up owing more at the end of the loan than the original loan amount. ⊚ true ⊚ false

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Answer Key Test name: chapter 5 1) B 2) C 3) B 4) C 5) D 6) A 7) B 8) A 9) C 10) C 11) D 12) B 13) C 14) C 15) D 16) D 17) A 18) B 19) FALSE 20) TRUE 21) TRUE 22) FALSE 23) FALSE 24) TRUE 25) FALSE 26) TRUE Version 1

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27) FALSE 28) FALSE 29) FALSE 30) FALSE Student name: 1) A house is for sale for $250,000. You have a choice of two 20-year mortgage loans with monthly payments: (1) if you make a down payment of $25,000, you can obtain a loan with a 6 percent rate of interest or (2) if you make a down payment of $50,000, you can obtain a loan with a 5 percent rate of interest. What is the effective annual rate of interest on the additional $25,000 borrowed on the first loan?

A) 1.00% B) 6.00% C) 12.95% D) 18.67%

2) A borrower has secured a 30-year, $150,000 loan at 7 percent with monthly payments.

Fifteen years later, the borrower has the opportunity to refinance with a fifteen year mortgage at 6 percent. However, the upfront fees, which will be paid in cash, are $2,500. What is the return on investment if the borrower expects to remain in the home for the next fifteen years?

A) 6.00% B) 13.00% C) 22.62% D) 28.89%

3) A borrower has secured a 30-year, $150,000 loan at 7 percent with monthly payments.

Fifteen years later, an investor wants to purchase the loan from the lender. If market interest rates are 5 percent, what would the investor be willing to pay for the loan?

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A) $75,000 B) $111,028 C) $126,196 D) $168,646

4) Which of the following statements concerning a 30-year, $150,000 loan at 7 percent with monthly payments is true if, 15 years later, an investor wants to purchase the loan and market interest rates are 5 percent?

A) The market value of the loan is higher than the book value of the loan because the market rate of interest is lower than the interest rate on the loan.

B) The market value of the loan is lower than the book value of the loan because the market rate of interest is lower than the interest rate on the loan.

C) The market value of the loan is higher than the book value of the loan because the market rate of interest is higher than the interest rate on the loan.

D) The market value of the loan is lower than the book value of the loan because the market rate of interest is higher than the interest rate on the loan.

5) A borrower is purchasing a property for $180,000 and can choose between two possible loan alternatives. The first is a 90 percent loan for 25 years at 9 percent interest and 1 point and the second is a 95 percent loan for 25 years at 9.25 percent interest and 1 point. Assuming the loan will be held to maturity, what is the incremental cost of borrowing the extra money?

A) 13.66% B) 13.50% C) 14.34% D) 12.01%

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6) A borrower is purchasing a property for $180,000 and can choose between two possible loan alternatives. The first is a 90 percent loan for 25 years at 9 percent interest and 1 point and the second is a 95 percent loan for 25 years at 9.25 percent interest and 1 point. Assuming 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%

7) When purchasing a $210,000 house, a borrower is comparing two loan alternatives. The first loan is a 90 percent loan at 10.5 percent for 25 years. The second loan is an 85 percent loan for 9.75 percent 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%

8) A borrower made a mortgage loan 7 years ago for $160,000 at 10.25 percent interest for 30 years. The loan balance is now $151,806.62 and rates for this amount are currently 9.0 percent for 23 years. Origination fees and closing costs are $4,500, and closing costs are not financed by the lender. What is the effective cost of refinancing?

A) 9.00% B) 10.85% C) 15.32% D) 9.39%

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9) Mr. Tramp made a mortgage 5 years ago for $85,000 at 8.25 percent interest and a 15year term. Rates have now risen to 10 percent for an equivalent loan. Mr. Tramp's lender is willing to discount the loan by $2,000 if he will prepay the loan. What rate of return would Mr. Tramp receive by prepaying the loan?

A) 10.24% B) 8.95% C) 14.32% D) 9.14%

10) A loan was made 10 years ago for $140,000 at 10.5 percent for a 30-year term. Rates are currently 9.25 percent. What is the market value of the loan?

A) $128,271 B) $147,600 C) $139,828 D) $151,395

11) Bud is offering a house for sale for $180,000 with an assumable loan which was made 5 years ago for $140,000 at 8.75 percent over 30 years. Kelsey is interested in buying the property and can make a $20,000 down payment. A second mortgage can be obtained for the balance at 12.5 percent for 25 years. What is the effective cost of the combined loans that Kelsey can use to compare this financing alternative to obtaining a first mortgage for the full amount?

A) 10.63% B) 9.39% C) 9.04% D) 11.27%

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12) A house is sold with an assumable $156,000 below-market loan at 8.5 percent for a remaining term of 15 years. Current rates are 9.75 percent for 15-year mortgages. If the house sold for $240,000, what is the cash-equivalent value of the house?

A) $250,834.82 B) $229,011.12 C) $260,660.40 D) $219,339.60

13) Ms. Madison has an existing loan with payments of $782.34. The interest rate on the loan is 10.5 percent and the remaining loan term is 10 years. The current balance of the loan is $57,978.99. The home is now worth $120,000 and Ms. Madison would like to borrow an additional $30,000 through a wraparound loan which would increase the debt to $87,978.99.

Terms of the wraparound loan are 12.25 percent interest with monthly payments for 10 years.

What is the incremental cost of borrowing the extra $30,000 through a wraparound loan?

A) 15.47% B) 11.38% C) 12.96% D) 13.41%

14) Mr. Fisher has built several houses and is offering buyers mortgage rates of 10 percent with a 15-year term. Current rates are 10.75 percent. Fourth National Bank will provide the loans if Mr. Fisher pays an equivalent amount up front to buy down the interest rate. If a house is sold for $290,000 with a 90 percent loan, how much would Mr. Fisher have to pay to buy down the loan?

A) $1,957.50 B) $11,989.34 C) $11,250.25 D) $10,790.41

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15) When calculating the cash equivalent value of an assumable loan, you find the present value of the payments using the: A) B) C) D)

16)

Which of the following is TRUE concerning wraparound Loans?

A) B) C) D)

17)

The borrower makes payments on an existing loan.

The lender makes payments on an existing loan.

The lender only makes payments on the second mortgage.

The borrower only makes payments on the second mortgage.

Which of the following is FALSE concerning buydown loans?

A) B) C) D)

18)

contract interest rate. incremental borrowing cost. market interest rate. discount rate.

They are often used during periods of high inflation.

They always lower the rate on the loan for the borrower for the entire loan term.

They help borrowers qualify for a loan.

They can be offered by home builders.

Which of the following is TRUE regarding the incremental cost of borrowing?

A) B) C) D)

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It should be less than the rate for a first mortgage.

It should be compared to the cost of obtaining a second mortgage.

It is used to calculate the APR for the loan.

It is independent of the loan-to-value ratio.

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19)

The market value of a loan is the: A) B) C) D)

20)

loan balance times one minus the market rate. loan balance times one minus the original rate. future value of the remaining payments. present value of the remaining payments.

Which of the following is an important aspect of the loan refinance decision process?

A) B) C) D)

Terms associated with the existing loan Terms of the new loan Fees associated with paying off the old loan and/or acquiring the new loan All of the choices are correct.

21) Ms. Towne is buying a home for $250,000 and is putting down 20 percent cash on the purchase. She is financing the rest with a 30-year, fixed rate mortgage with a rate of 4.625 percent, but is considering an option that would allow her to make biweekly payments. How much interest would the biweekly payment option allow her to save over the life of the loan and how long would it take to pay off the loan?

A) $29,528; 25.5 years B) $33,234; 22.2 years C) $29,528; 22.2 years D) $33,234; 25.5 years

22) A borrower finds that the incremental cost of borrowing an extra $10,000 is 14 percent.

The borrower can earn 12 percent on alternative investments of comparable risk so he would be better off by not borrowing the extra 14 percent.

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⊚ ⊚

true false

23) A borrower finds that the incremental cost of borrowing an extra $10,000 is 14 percent. A second loan can be obtained at 15 percent so the borrower would be better off borrowing a smaller amount on the original loan and borrowing $10,000 with a second loan. ⊚ ⊚

true false

24) The cash equivalent value of a house that sold with favorable financing is usually less than its sale price. ⊚ true ⊚ false

25) The effective cost of a wraparound loan should be comparable to the cost of a second mortgage with the same loan-to-value ratio. ⊚ true ⊚ false

26) A borrower is considering refinancing and finds that the return, considering refinancing charges and lower payments, is 10 percent. The borrower can earn 12 percent on alternative investments so the property should be refinanced. ⊚ ⊚

true false

27) Homeowners should not borrow refinancing costs because the effective rate of refinancing will be higher.

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⊚ ⊚

28)

true false

If interest rates decrease, the market value of a loan previously made will increase. ⊚ true ⊚ false

29) A house that is financed with a below-market loan is available for sale. The value of the house will be higher than similar properties regardless of the other terms of the loan. ⊚ true ⊚ false

30) A potential buyer is interested in purchasing a home that has an assumable below-market loan. The buyer determines that the financing premium associated with the below-market loan is worth $4,300. If similar houses sell for $100,000, the buyer should be willing to pay $104,300 or more for the property. ⊚ true ⊚ false

31) Buydown loans have initial payments that are lower than they would be without the buydown provision. ⊚ true ⊚ false

32) A loan with biweekly payments will have more interest than a monthly loan with the same interest rate and loan term. ⊚ true ⊚ false

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33)

Home equity loans do not require a mortgage lien on the property. ⊚ true ⊚ false

34) The incremental cost of borrowing may also be referred to as the marginal cost of borrowing. ⊚ true ⊚ false

35) The primary benefit of choosing biweekly mortgage payments versus monthly payments is the savings from lowering the average amount paid each month. ⊚ true ⊚ false

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Answer Key Test name: chapter 6 1) C 2) D 3) C 4) A 5) A 6) A 7) D 8) D 9) B 10) C 11) B 12) B 13) A 14) D 15) C 16) B 17) B 18) B 19) D 20) D 21) A 22) TRUE 23) FALSE 24) TRUE 25) TRUE 26) FALSE Version 1

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27) FALSE 28) TRUE 29) FALSE 30) FALSE 31) TRUE 32) FALSE 33) FALSE 34) TRUE 35) FALSE Student name: 1) Assume that houses in an area appreciate at the rate of 4 percent a year. A borrower expects to have a loan-to-value ratio of 90 percent. What is the approximate expected appreciation rate on home equity?

A) 4.0% B) 10% C) 20% D) 40%

2)

Which of the following statements best describes the "wealth effect"?

A) Households with equity in their houses are wealthier than households that rent their housing.

B) Expected appreciation in assets, such as home equity, may increase spending on other goods and services in the economy.

C) Economists believe that wealthier households have a positive effect on the housing market, while low-income households have a negative effect.

D) A 10 percent increase in homeownership is associated with a 12 percent increase in economic growth.

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3) A property is purchased for $200,000 with an 80 percent LTV. After five years, the owner's equity is $80,000. What would be the approximate annual expected appreciation rate on home equity?

A) 13.9% B) 14.9% C) 20.0% D) 80.0%

4)

A region has a location quotient of 0.5 for manufacturing. This means that:

A) the region’s share of employment in manufacturing is twice as large as the share of manufacturing employment in the U.S. B) the region’s share of employment in manufacturing is half as large as the share of manufacturing employment in the U.S. C) manufacturing is a "base" or "driver" industry for the region D) both the region's share of employment in manufacturing is twice as large as the share of manufacturing employment in the U.S. and manufacturing is a "base" or "driver" industry for the region.

E) both the region's share of employment in manufacturing is half as large as the share of manufacturing employment in the U.S. and manufacturing is a "base" or "driver" industry for the region.

5)

The capitalization effect:

A) is one of the major factors leading to housing bubbles.

B) has no impact on housing prices.

C) relates the quality of public services that individuals receive relative to the taxes that are paid for the services.

D) relates the interest rate on mortgage loans to the value of residential real estate.

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6)

The objective of an appraisal is to:

A) establish the highest possible price that a property can sell for.

B) establish the most probable price that would be paid for a property under competitive market conditions.

C) establish the market value for a property’s land without any structures (such as a house).

D) establish the market value for a property if the property is put to its highest and best use.

7) An appraisal usually contains three approaches to valuation. Which of the following is NOT one of those approaches?

A) B) C) D)

The market approach The ratio approach The cost approach The income approach

8) The subject property of an appraisal has only two bedrooms, but one of the comparables used in the appraisal has three bedrooms. If the adjustment for a third bedroom is $5,000, the adjustment would be:

A) B) C) D)

9)

a $5,000 increase to the comparable's selling price. a $5,000 decrease to the comparable's selling price. a $5,000 increase to the subject's selling price. a $5,000 decrease to the subject's selling price.

The appraised value of a property usually represents the:

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A) B) C) D)

actual value of the property. actual selling price of the property. actual opinion of an appraiser. actual replacement value of the property.

10) When considering the federal income tax treatment for housing, which of the following is tax deductible?

A) B) C) D)

Mortgage principal and interest paid Mortgage interest paid Homeowner's insurance paid Mortgage principal paid

11) When calculating taxes, the difference between the acquisition cost and selling price of a house is called: A) B) C) D)

12)

ordinary income. amortization. capital gain. deferred income.

Which of the following would NOT result in an increase in housing demand?

A) B) C) D)

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Population growth Employment growth Higher interest rates Higher household income

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13) The influence on property values brought about by a net benefit related to the value of public goods less their cost is referred to as: A) B) C) D)

a capital gain. a capital loss. the capitalization effect. the depreciation effect.

14) When a homeowner improves some aspect of his property far in excess of comparable properties in the neighborhood, he is said to have: A) B) C) D)

15)

Federal income tax policy has generally been thought to: A) B) C) D)

16)

underimproved the property. overimproved the property. reached the point of increasing returns. exceeded the breakeven point.

discourage homeownership. encourage renting. increase interest rates. encourage homeownership.

Which of the following is NOT tax deductible for homeowners?

A) B) C) D)

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Points in mortgage loans Mortgage interest Property taxes Maintenance expenses

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17) A home sales transaction in which the seller was not under undue pressure to sell for a discounted or inflated price (e.g., foreclosure, selling to family member, etc.) is referred to as a(n): A) B) C) D)

18)

aboveboard transaction. arm’s-length transaction. parsed transaction. tainted transaction.

Which of the following is NOT a factor in causing a property to become distressed?

A) B) C) D)

Borrower’s personal debts Delinquent property taxes Delinquent homeowner’s insurance bill Borrower’s inability to make mortgage payments

19) If the cost of rental housing increases relative to house prices, demand for purchased housing tends to increase. ⊚ true ⊚ false

20)

If mortgage interest rates increase, demand for purchased housing tends to increase. ⊚ true ⊚ false

21) Cluster analysis using location quotients and/or employment multipliers provides a snapshot of employment at a point in time but does not provide a forecast of future employment in a specific industry. ⊚ true ⊚ false

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22) One concern of appraisers when using the sales comparison approach is that financing benefits paid for by a seller of a property may result in a selling price for the comparable property that is lower than the market value. ⊚ true ⊚ false

23)

A housing bubble occurs when there is a big increase in the supply of homes. ⊚ true ⊚ false

24)

Use of construction costs is very important in the sales comparison approach to valuation. ⊚ true ⊚ false

25) Mortgage interest and property taxes are deductible for federal income tax purposes for homeowners. ⊚ true ⊚ false

26) When the value of public goods exceeds their cost, the effect on house prices is called the "capitalization effect." ⊚ true ⊚ false

27) Population increases are usually associated with increases in demand and house price appreciation.

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⊚ ⊚

true false

28) It is likely that two identical houses located in different school districts will sell for different prices. ⊚ true ⊚ false

29) Estimating the land value for an improved property cannot be accomplished using the sales comparison method of valuation. ⊚ true ⊚ false

30) When using the cost approach to valuation, current market data for land values must be obtained. ⊚ true ⊚ false

31) The appraisal function is purely objective; an appraiser's judgment is not part of the decision process. ⊚ true ⊚ false

32) Residential appraisers use only the sales comparison approach to determine value of the homes they appraise. ⊚ true ⊚ false

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33) Housing futures contracts allow investors to speculate on changes in home prices without actually owning a home. ⊚ true ⊚ false

34)

A location quotient is the ratio of total employment to base employment. ⊚ true ⊚ false

35) Comparable properties must be chosen from those homes that have been sold or have been listed for sale most recently, and that are located in the same city as the subject property. ⊚ ⊚

true false

36) Potential investors, in analyzing the profit potential for a distressed property, generally consider a financial framework including the acquisition phase, the holding period phase, and the disposition phase. ⊚ ⊚

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true false

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Answer Key Test name: chapter 7 1) D 2) B 3) B 4) B 5) C 6) B 7) B 8) B 9) C 10) B 11) C 12) C 13) C 14) B 15) D 16) D 17) B 18) C 19) TRUE 20) FALSE 21) TRUE 22) FALSE 23) FALSE 24) FALSE 25) TRUE 26) TRUE Version 1

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27) TRUE 28) TRUE 29) FALSE 30) TRUE 31) FALSE 32) FALSE 33) TRUE 34) FALSE 35) FALSE 36) TRUE Student name: 1) In some cases, lenders require that borrowers obtain default insurance. The purpose of such insurance is to: A) B) C) D)

decrease the effective interest rate on the loan. increase the value of the underlying property. protect the borrower from defaulting on the loan. protect the lender from losses associated with borrower default on the loan.

2) Which of the following is NOT typically included in housing costs used to calculate a borrower’s payment-to-income ratio?

A) B) C) D)

3)

Principal and interest on the mortgage applied for Mortgage insurance Property taxes Utilities

A conforming loan:

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A) B) C) D)

4)

A jumbo loan: A) B) C) D)

5)

is another term for an adjustable rate mortgage loan. meets loan limits of loans that Fannie Mae and Freddie Mac can buy. tends to have a higher interest rate than conforming loans. has lower LTV requirements than conforming loans.

The payment-to-income ratio is BEST described as the: A) B) C) D)

6)

exceeds the loan limits of loans that Fannie Mae and Freddie Mac can buy. meets loan limits of loans that Fannie Mae and Freddie Mac can buy. cannot be purchased by GSEs such as Fannie Mae and Freddie Mac. is another term for a fixed rate mortgage loan.

factor used to determine if interest on mortgage loans is tax deductible. only measure of a borrower's ability to fulfill his or her loan obligations. ratio of the estimated rental income to the expected payments on a rental property. ratio of the expected payments on a property to the income of the borrower.

An escrow account:

A) ensures that a default insurance policy does not lapse if a borrower is in danger of default.

B) ensures that sufficient funds are collected to make annual hazard insurance and property tax payments.

C) is a non-interest-bearing account into which a borrower prepays certain fees and taxes.

D) is characterized by all of the choices.

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7)

Which of the following groups customarily does NOT attend a real estate closing?

A) B) C) D)

The buyer and seller The buyer’s and seller’s immediate families Real estate broker(s) Settlement agent(s)

8) What document usually summarizes the sources, disbursements, charges and credits associated with a real estate closing?

A) B) C) D)

The purchase contract The deed of trust The listing agreement The settlement statement

9) Which of the following is typically NOT one of the financing costs associated with the financing of real estate?

A) B) C) D)

Mortgage insurance fees Loan application and credit report fees Property inspection and appraisal fees Loan discount and prepaid interest fees

10) Which of the following is typically NOT one of the settlement costs that are escrowed over the life of the loan?

A) B) C) D)

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Property taxes Mortgage insurance Selling commissions Hazard insurance

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11)

Which of the following is NOT one of the essential aspects of RESPA? A) B) C) D)

Advance disclosure of settlement costs Limitations on the cost of mortgages Prohibition of kickbacks and unearned fees Limitations on escrow deposits

12) RESPA requires lenders to disclose to buyers a good faith estimate of certain closing costs within: A) B) C) D)

one day before the real estate closing. three days before the real estate closing. one day after loan application. three days after loan application.

13) The uniform settlement statement presented at the closing displays settlement summaries for which of the following parties?

A) B) C) D)

14)

Borrower and seller Borrower and broker Borrower, seller, and broker Borrower, seller, and lender

Which of the following is the main objective of the FTL legislation?

A) B) C) D)

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More effective advance disclosure of settlement costs More informative disclosure of the cost of credit Elimination of kickbacks and unearned fees A reduction in the amount of escrow placed in accounts for homeowners

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15) RESPA requires lenders to disclose to buyers a uniform settlement statement detailing all closing costs within: A) B) C) D)

16)

one day before the real estate closing. three days before the real estate closing. one day after loan application. three days after loan application.

The APR estimate must be accurate to the nearest

percent.

A) 1/2 B) 1/4 C) 1/8 D) 1/16

17) A self-employed borrower who has documentable assets but is not able to provide adequate documentation for his income may be eligible for which type of loan?

A) B) C) D)

18)

FNMA FHLMC Conforming Alt-A

GSE is the abbreviation for: A) B) C) D)

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government-sponsored entity. government-specific entity. government-sponsored enterprise. government-specific enterprise.

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19) Which of the following organizations provides lenders with complete protection against default losses?

A) B) C) D)

FHA FNMA FHLMC VA

20) For a loan with an LTV greater than 80 percent, the costs of mortgage insurance always exceed the costs of second lien financing. ⊚ true ⊚ false

21) The Federal Housing Administration provides mortgage insurance, but does not make loans. ⊚ true ⊚ false

22) General industry standards for a conventional loan specify a maximum LTV of 60 percent. ⊚ true ⊚ false

23) Determining the APR for federal truth-in-lending purposes is more complicated for an adjustable rate mortgage loan than it is for a fixed rate mortgage loan. ⊚ true ⊚ false

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24) The APR for an adjustable rate mortgage loan is an accurate measure of the actual cost of funds to the borrower. ⊚ true ⊚ false

25) A residential real estate closing involves two actual closings: the loan closing and the sales transaction closing. ⊚ true ⊚ false

26)

Financing costs are usually paid by the lender to either the borrower/buyer or the seller. ⊚ true ⊚ false

27)

Proration involves a professional who rates the quality of the property. ⊚ true ⊚ false

28) To protect themselves from loss due to default, most lenders require borrowers to acquire hazard insurance policies. ⊚ true ⊚ false

29)

Title insurance protects the buyer from title claims against the property. ⊚ true ⊚ false

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30) One of the objectives of RESPA was to disclose kickbacks and unearned fees on the settlement sheet. ⊚ true ⊚ false

31) RESPA requires a lender to disclose good faith estimates of closing costs within three days of loan application. ⊚ true ⊚ false

32)

The FTL Act and RESPA essentially say the same things. ⊚ true ⊚ false

33) The FTL Act requires that the lender provide a financing statement of the exact closing costs within three days of loan application. ⊚ true ⊚ false

34)

The calculated APR usually represents the true costs of financing. ⊚ true ⊚ false

35) A conforming mortgage is one for which the US Treasury will provide credit backing through the GSEs. ⊚ true ⊚ false Version 1

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36)

Someone with a credit score of 900 is likely to only qualify for a subprime loan. ⊚ true ⊚ false

37) A borrower who was required to purchase private mortgage insurance as a condition of their mortgage should be able to eliminate that requirement if the LTV of a home is proven to have dropped to less than 85 percent. ⊚ true ⊚ false

38) In order to avoid the requirement to purchase private mortgage insurance when the LTV is greater than 80 percent, a buyer may be able to take out a first mortgage for 80 percent or less and couple it with a second mortgage to account for the remainder of the necessary funds. ⊚ true ⊚ false

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Answer Key Test name: chapter 8 1) D 2) D 3) B 4) C 5) D 6) D 7) B 8) D 9) A 10) C 11) B 12) D 13) A 14) B 15) A 16) C 17) D 18) C 19) A 20) FALSE 21) TRUE 22) FALSE 23) TRUE 24) FALSE 25) TRUE 26) FALSE Version 1

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27) FALSE 28) FALSE 29) TRUE 30) FALSE 31) TRUE 32) TRUE 33) FALSE 34) FALSE 35) TRUE 36) FALSE 37) FALSE 38) TRUE Student name:

1) Consider the figure above. Point D represents:

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A) B) C) D)

equilibrium occupancy. market rent. vacancy. shortage.

2) Consider the figure above. The difference between the existing stock of space and Point D represents: A) B) C) D)

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equilibrium occupancy. market rent. vacancy. shortage.

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3) Consider the figure above. If the demand for units increases, what would happen in equilibrium, holding everything else constant?

A) B) C) D)

Market rent would decrease; equilibrium occupancy would decrease Market rent would decrease; equilibrium occupancy would increase Market rent would increase; equilibrium occupancy would decrease Market rent would increase; equilibrium occupancy would increase

4) For which of the following reasons would a business prefer to own space rather than lease it?

A) The business demands specialized or unique facilities.

B) Owning allows the business to develop skills in operating, maintaining, and repairing real estate and the associated facilities.

C) Owning reduces operating flexibility.

D) The capital commitments with owning are lower than the capital commitments associated with leasing.

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5) 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 10 percent discount rate, what is the effective rent over the three years?

A) $20.00 B) $20.94 C) $21.73 D) $52.07

6) A building owner charges net rent of $20 in the first year, $21 in the second year, and $22 in the third year, but is providing six months of free rent in the first year as a concession. Using a 10 percent discount rate, what is the effective rent over the three years?

A) $17.28 B) $18.94 C) $20.94 D) $42.98

7)

Which of the following is NOT considered to be an office or retail property?

A) B) C) D)

Single tenant—build to suit Regional shopping center Warehouse Community center

8) The difference between the existing stock of space and the equilibrium occupancy is known as: A) B) C) D)

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supply. demand. equilibrium. vacancy.

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9) The dollar amount by which total rent exceeds base rent under a percentage lease for retail is referred to as: A) B) C) D)

10)

overage rent. excess rent. percentage rent. marginal rent.

The supply of space is: A) B) C) D)

inelastic in both the short run and the long run. elastic in both the short run and the long run. relatively inelastic in the short run, and highly elastic in the long run. relatively elastic in the short run, and highly inelastic in the long run.

11) Expenses for a 1,000-square-foot office space are $6.00 per square foot. The lease specifies an expense stop of $5.40. What is the total expense paid by the landlord?

A) $5,400 B) $6,000 C) $600 D) $0

12) A 1,500-square-foot office space is leased at $12.00 square foot. The space is vacant one month out of the year. Office expenses are $6.50 per square foot and an expense stop is set at $6.00 per square foot. What is the annual net operating income?

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A) $7,500 B) $6,750 C) $15,750 D) $8,250

13) A clause which requires a tenant in retail space to achieve a certain level of sales or the lease will be terminated is referred to as a(n): A) B) C) D)

change clause. termination clause. option clause. santa clause.

14) A clause in a non-anchor tenant's lease requiring the presence of an anchor tenant is referred to as a(n): A) B) C) D)

Noncompete clause.

Cotenancy clause.

Joint tenancy clause.

Anchor clause.

15) Income after deducting loss of rents due to vacancy and nonpayment of rents, as well as any concessions, is referred to as: A) B) C) D)

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potential gross income. effective gross income. net operating income. before-tax cash flow.

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16) A 1,000-square-foot office space is leased at $15.00 per square foot during the first year with $2.00 step-up provisions each of the following years. The lease is gross with an expense stop set at $6.65 per square foot, and yearly expenses per square foot are as follows: $6.00, $6.65, and $7.05. The lease provides for two months of free rent at the end of the lease term. If the lease term is three years and the discount rate is 10 percent, what is the effective rent per square foot?

A) $9.38 B) $9.50 C) $10.22 D) $10.46

17)

Which of the following does the term "anchor tenant" usually refer to?

A) B) C) D)

18)

Which of the following describes the function of an expense stop in a lease?

A) B) C) D)

19)

Someone who leases space The largest tenant in an office building A department store in a mall The tenant who pays the highest rent in a mall

Expenses are stopped from increasing Expenses above the stop are paid by the owner Expenses above the stop are paid by the tenant Expenses below the stop are paid for by the tenant

Which of the following is TRUE for a net lease?

A) B) C) D)

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All expenses are paid by the owner All expenses are paid by the tenant All expenses are paid by the lender All expenses are paid by the investor

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20)

Which of the following tends to lower effective rents?

A) B) C) D)

21)

Which of the following does the term "in-line tenants" refer to?

A) B) C) D)

22)

Smaller stores in a mall that are not anchor tenants Tenants whose sales are in line with estimates Tenants who pay their rents on a timely basis All stores located inside the mall, including anchors

Which of the following is FALSE regarding cap rates?

A) B) C) D)

23)

Percentage rent Step-up provisions Concessions CPI adjustment

Excess supply tends to drive cap rates up.

Rising interest rates generally tend to lower cap rates.

Excess demand and falling interest rates result in lower cap rates.

Excess demand leads to lower cap rates.

Which of the following leads to rent premiums?

A) B) C) D)

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Apartments on the periphery of a site; higher floors with no elevators Second or third levels in multi-level malls Middle floors in an office building Apartments on higher floors with elevators

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24) The price a potential tenant must pay to lease a specific type of real estate under the current economic conditions is: A) B) C) D)

25)

percentage rent. market rent. effective rent. base rent.

Which of the following would be considered as expense pass throughs in a lease?

A) B) C) D)

Electricity Landscaping fees Security costs Property taxes

26) A manufacturing business is contracting to lease a large, open building and is seeking to add partition walls and a large air conditioning unit in order to accommodate its specific needs.

What type of lease is the building owner likely to want to agree to?

A) B) C) D)

Gross lease Modified lease with direct pass throughs Single net lease Triple net lease

27) Analysis of effective rents tends to be superior to analysis of total rents over the life of alease. ⊚ true ⊚ false

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28) The existing stock of space cannot be adjusted in the short run, but can be increased or decreased in the long run. ⊚ true ⊚ false

29) To attract anchor tenants, property owners tend to charge them lower rents. They make up for the lower rents by charging the anchor tenant higher CAM charges. ⊚ true ⊚ false

30)

Overage rent is rent that exceeds expenses. ⊚ true ⊚ false

31)

The term "percentage rent" refers to rent paid as a percent of space leased. ⊚ true ⊚ false

32) A gross lease is one in which the tenant only pays rent, and the owner of the property pays the operating expenses and provides all services. ⊚ true ⊚ false

33) The term "usable area" is typically synonymous with "leasable area," in a building with multiple tenants. ⊚ ⊚

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true false

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34)

The use of a CPI index in a lease contract shifts risk to the tenant. ⊚ true ⊚ false

35)

Expense stops protect the lessee from unexpected changes in market rents. ⊚ true ⊚ false

36)

A gross lease is riskier for the lessor than a net lease. ⊚ true ⊚ false

37) In projecting cash flows for an office property, net operating income is the income after deduction of mortgage payments. ⊚ true ⊚ false

38)

Free rent is a concession that a building owner may offer. ⊚ true ⊚ false

39)

CPI adjustments are used to adjust rents by all or part of the increase in the CPI. ⊚ true ⊚ false

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40)

Condominium complexes are considered to be nonresidential properties. ⊚ true ⊚ false

41) The great majority of businesses lease the space they occupy rather than purchasing it outright. ⊚ true ⊚ false

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Answer Key Test name: chapter 9 1) A 2) C 3) D 4) A 5) B 6) A 7) C 8) D 9) A 10) C 11) A 12) A 13) B 14) B 15) B 16) B 17) C 18) C 19) B 20) C 21) A 22) B 23) D 24) B 25) D 26) D Version 1

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27) TRUE 28) TRUE 29) FALSE 30) FALSE 31) FALSE 32) TRUE 33) FALSE 34) TRUE 35) TRUE 36) FALSE 37) FALSE 38) TRUE 39) TRUE 40) FALSE 41) TRUE Student name: 1) Consider the table. Assume that the subject property has effective gross income of $53,000 and an NOI of $27,500. What value would a GIM approach yield (rounded to the nearest $100)?

Comp 1

Comp 2

Comp 3

Price Effective gross income % operating expense

$ 300,000 50,000 50%

$ 350,000 55,000 55%

$375,000 60,000 54%

NOI

$ 25,000

$ 30,000

$ 32,500

A) $322,600 B) $325,600 C) $328,800 D) $330,000

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2) Consider the table. Assume that the subject property has effective gross income of $53,000 and a NOI of $27,500. What value would a cap rate approach yield (rounded to the nearest $100)?

Comp 1

Comp 2

Comp 3

Price Effective gross income % operating expense

$ 300,000 50,000 50%

$ 350,000 55,000 55%

$375,000 60,000 54%

NOI

$ 25,000

$ 30,000

$ 32,500

A) $322,600 B) $325,600 C) $328,600 D) $330,000

3) Which of the following statements regarding the sales comparison approach to appraisal is TRUE? A) As a "rule of thumb" transactions involving foreclosures should be discounted by 10 percent.

B) The comparable buildings’ characteristics are more important than the comparable properties’ locations for performing the sales comparison.

C) The comparable sales must involve transactions between unrelated individuals.

D) The only factors important for comparable analysis are property size, building size, age of the building, and the condition of building.

4) Which of the following techniques is NOT associated with the income approach to valuation?

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A) B) C) D)

Capitalization rate Discounted present value Factor discounting rates Gross income multiplier

5) Consider a building with a very long economic life. Assume at the end of Year 6, NOI will be $80,000 and is expected to grow at a rate of 2 percent per year. Your company’s required rate of return is 12 percent. As part of your analysis, you must calculate the reversion value (REV) at the end of Year 5, which would be: A) $571,429.

B) $666,667.

C) $800,000.

D) $4,000,000.

6) Consider a property with NOI of $72,000 and a debt coverage ratio of 1.2 applied to first year NOI. What would be the estimated monthly mortgage payment?

A) $5,000 B) $7,200 C) $60,000 D) $86,400

7) Consider the table for an income property that is under evaluation for purchase with a $455,000 loan. Using the principles of mortgage equity capitalization, what is the estimated total property value (rounded to the nearest $100)?

NOI DS Cash flow

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Year 1

Year 2

Year 3

$ 72,000 60,000 $ 12,000

$ 74,880 60,000 $ 14,880

$ 77,875 60,000 $ 17,875

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Resale in Year 3

900,000

Less mortgage balance

−435,000

Total cash flow Present value of cash flow @ 15%

$ 12,000 $ 10,435

$ 14,880 $ 11,251

$ 482,875 $ 317,498

A) $317,500 B) $482,900 C) $772,500 D) $794,200

8) Consider the table for an income property that is under evaluation for purchase with a $455,000 loan. What would be the equity dividend rate?

NOI DS Cash flow Resale in Year 3

Year 1

Year 2

Year 3

$ 72,000 60,000 $ 12,000

$ 74,880 60,000 $ 14,880

$ 77,875 60,000 $ 17,875 900,000

Less mortgage balance Total cash flow Present value of cash flow @ 15%

−435,000 $ 12,000 $ 10,435

$ 14,880 $ 11,251

$ 482,875 $ 317,498

A) 2.4 % B) 3.5 % C) 4.2% D) 5.3%

9)

Which of the following factors is NOT part of the definition of market value?

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A) Payment is made in terms of cash in U.S. dollars or a comparable financial arrangement B) The property has been on the open market for less than a year C) Buyer and seller are typically motivated D) Price is not affected by special or creative financing

10)

Regarding the value of a property, an appraisal: A) B) C) D)

11)

Which of the following steps normally would be used in the cost approach to value?

A) B) C) D)

12)

calculates value. confirms value. estimates value. determines value.

Estimate net operating income of the property Multiply accrued depreciation by the assessed cost Add actual construction costs to the land value Subtract accrued depreciation from the replacement cost

Which of the following choices represents the main categories of depreciation?

A) B) C) D)

Physical, external, functional Physical, economic, locational External, structural, financial Economic, physical, external

13) A comparable property has a feature that is superior to the subject property. What adjustment would be made in the sales comparison approach to value?

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A) property B) C) D)

14)

Value of the feature would be subtracted from the sales price of the comparable Value of the feature would be added to the sales price of the comparable property Value of the feature would be subtracted from the value of the subject property Value of the feature would be added to the value of the subject property

Given the following sales adjustment grid, what adjustment would be made for size?

Characteristic Sales price

Subject

Square feet Exterior Age

1,800 Alum 16

1

2

3

4

116,000

120,000

124,000

126,000

1,700 Brick 20

1,900 Alum 20

1,900 Alum 18

1,900 Brick 20

A) $23.65 psf.

B) $45.82 psf.

C) $65.74 psf.

D) $38.26 psf.

15) Which of the following expenses would NOT be included in an operating statement used to calculate net operating income in the income approach to value?

A) B) C) D)

Reserves for replacement Maintenance Real estate taxes Capital additions

16) A property is sold for $200,000. Typical financing terms are an 85 percent loan with a 10 percent interest rate over 15 years. If the before-tax cash flow is $2,000, what is the overall capitalization rate?

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A) 10.96% B) 11.96% C) 19.13% D) 9.96%

17) A property produces a first-year net operating income of $24,000. Because of the long economic life of the building, the income is considered as a perpetuity that will grow by 2.5 percent per year. Using a discount rate of 9.5 percent, the property value is estimated at: A) $276,968.

B) $252,632.

C) $200,000.

D) $342,857.

18) A property is leased for $24,000 per year although market rents are currently $27,500 per year and are expected to increase by 2 percent per year. The property is expected to be sold at the end of Year 10 based on a 10 percent terminal cap rate applied to the eleventh year NOI. The current lease on the property will expire at the end of Year 10 so the property can be leased in the eleventh year at market rates. What is the value of the leased fee estate based on an 11.5 percent discount rate?

A) $362,489 B) $298,325 C) $251,298 D) $271,486

19) The discount rate is a rate that a typical investor would normally require as a(n) return over investment holding period.

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A) B) C) D)

20)

Total possible income less any vacancy is A) B) C) D)

21)

maximum risk-free expected historical

.

effective gross income potential gross income net operating income gross income multiplier

Which of the following is TRUE concerning the capitalization rate?

A) It is an IRR. B) It explicitly considers projected future income and changes in property value over

time.

C) It expresses relationships between income and property value at a specific point in time.

D) It is the rate of return that investors expect to earn on all capital invested.

22)

Capitalization rates will differ from yield rates when the income is expected to over time.

A) B) C) D)

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stay the same increase decrease increase, decrease, or do both

102

23) Which is of the following is NOT normally considered when conducting an appraisal using the cost approach?

A) B) C) D)

24)

Functional obsolescence Effective age Capitalization rate Replacement cost

Which lease has the LOWEST effective rent?

Lease A B C D

Year 1 10 0 0 15

A) B) C) D)

Year 2 11 13 0 14

Year 3 12 14 20 13

Year 4 13 15 20 12

Year 5 14 16 22 11

Lease A Lease B Lease C Lease D

25) Which of the following income capitalization techniques is based on the principle that buyers will not pay more for a property than the present value (PV) of all future net operatingincomes (NOI)?

A) B) C) D)

Direct capitalization method Effective gross income method Potential gross income method Discounted cash flow method

26) The difference between the total property value (accounting for rents and cash flows) and the cost of constructing an improvement on a given site is the:

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A) B) C) D)

residual land value. highest and best use value. land value differential. excess land value.

27) The principle that an informed purchaser would not spend more for a piece of real estate than the cost to purchase the land and the cost to construct a structure provides the rationale for which of these valuation methods?

A) B) C) D)

Sales comparison approach Income approach Cost approach Direct capitalization approach

28) The sales comparison approach to appraisal is preferred because it is the only objective appraisal approach. ⊚ true ⊚ false

29) When using the gross income multiplier technique in conjunction with the income approach to valuation, potential gross income is preferred to effective gross income. ⊚ true ⊚ false

30) One advantage of the gross income multiplier technique is that it is most suitable for properties in which operating expenses vary widely across the properties being surveyed. ⊚ true ⊚ false

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31) The rationale for using the cost approach to appraisal is that any informed buyer would not pay more for a property than what it would cost to buy the land and build the structure. ⊚ true ⊚ false

32) When conducting an appraisal, only one of three approaches should be selected to determine the property value. ⊚ true ⊚ false

33) In the cost approach to valuation, land value can be estimated by comparing sales of vacant land that are similar to the subject land. ⊚ true ⊚ false

34) In the income approach to valuation, replacement cost is reduced by costs such as those that are associated with curing deterioration of the property and the economic loss of value from incurable factors due to change in design or layout efficiency. ⊚ true ⊚ false

35) A building has 12 foot ceilings that cause the electric bill to be $1,200 higher per year than a conventional ceiling height. Depreciation caused by the ceilings can be estimated by calculating the present value of the $1,200 per year over the remaining economic life of the building. ⊚ true ⊚ false

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36) A gross income multiplier can be calculated by dividing the gross income by the sales price. ⊚ true ⊚ false

37) An overall capitalization rate can be calculated by dividing the net operating income by the property value. ⊚ true ⊚ false

38) The capitalization rate is equal to the discount rate minus any expected annual growth in income and property value. ⊚ true ⊚ false

39) A property is purchased for $350,000. Based on an annual growth rate of 3 percent, the resale value at the end of Year 10 would be $456,671. ⊚ true ⊚ false

40) The capitalization rate for a leased fee estate should always be lower than the capitalization rate for a fee simple estate. ⊚ true ⊚ false

41) The equity value can be estimated by subtracting debt service from net operating income and dividing this amount by the equity dividend rate.

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⊚ ⊚

true false

42) The cost approach is not reliable when the structure is relatively new and depreciation does not present serious complications. ⊚ true ⊚ false

43)

Appraisers use bracketing in order to estimate the upper and lower range of value. ⊚ true ⊚ false

44) Return on investment and change in net operating income are essential factors for cost analysis. ⊚ true ⊚ false

45) The capitalization rate of a newly constructed apartment building will be more than that of a relatively old apartment building, which is comparable in all other aspects. ⊚ true ⊚ false

46) The assumption that a knowledgeable buyer would not pay more for property than what other buyers have recently paid for comparable properties provides the rationale for the sales comparison approach. ⊚ true ⊚ false

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47) The discount rate establishes the minimum return that an investor is willing to accept when evaluating the potential purchase of an income-producing property. ⊚ true ⊚ false

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Answer Key Test name: chapter 10 1) C 2) A 3) C 4) C 5) C 6) A 7) D 8) B 9) B 10) C 11) D 12) A 13) A 14) C 15) D 16) B 17) D 18) C 19) C 20) A 21) C 22) D 23) C 24) B 25) D 26) A Version 1

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27) C 28) FALSE 29) FALSE 30) FALSE 31) TRUE 32) FALSE 33) TRUE 34) FALSE 35) TRUE 36) FALSE 37) TRUE 38) TRUE 39) FALSE 40) FALSE 41) TRUE 42) FALSE 43) TRUE 44) FALSE 45) FALSE 46) TRUE 47) TRUE Student name: 1) Which of the following is NOT one of the primary benefits of investing in real estate income property?

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A) Net Income—Dollars left over after collecting rent and paying expenses but before considering taxes and financing costs B) Property Sale—Expecting a price increase over a specified holding period increases investor return C) Diversification—Reducing overall risk to hold many types of investments D) Business cycles—Real estate income properties tend to generate higher incomes when other investments are in decline

2)

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.

B) The amount of equity an investor has in a property depends on the value of the equity the investor has in his or her other investments.

C) The outstanding loan balance on the property does not affect the amount of equity an investor has in the property.

D) All of the choices are true statements.

3)

Which of the following statements is TRUE regarding an effective tax rate?

A) B) C) D)

4)

It takes into account the effects of depreciation and time value of money.

It measures the actual difference between the BTIRR and the ATIRR. It can be less than the actual marginal tax rate.

All of the choices are true statements.

Which of the following statements is TRUE regarding the real estate industry?

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A) It is highly competitive.

B) It is a relatively small market.

C) It is relatively concentrated, with a few owners controlling most of the market in most areas.

D) All of the choices are true statements.

5) A restaurant is for sale for $200,000. It is estimated that the restaurant will earn $20,000 a year for the next 15 years. At the end of 15 years, it is estimated that the restaurant will sell for $350,000. Which of the following would be MOST LIKELY to occur if the investor’s required rate of return is 15 percent?

A) B) C) D)

Investor would pursue the project.

Investor would not pursue the project.

Investor would pursue the project if the holding period were longer than 15 years.

Not enough information provided to answer.

6) A property produces a first year NOI of $100,000 which is expected to grow by 2 percent per year. If the property is expected to be sold in Year 10, what is the expected sale price based on a terminal capitalization rate of 9.5 percent applied to the eleventh year NOI? A) $1,308,815 B) $1,283,152 C) $1,263,158 D) $1,257,992

7) A property that produces a first year NOI of $80,000 is purchased for $750,000. The NOI is expected to increase by 15 percent in the sixth year when some of the leases turn over. The resale price in Year 10 is expected to be $830,000. What is the net present value of the property based on the 10-year holding period and a discount rate of 9.5 percent?

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A) $87,433 B) $87,221 C) $95,294 D) $116,490

8) A property is purchase for $15 million. Financing is obtained at a 75 percent loan-tovalue ratio with total annual payments of $1,179,000. The property produces an NOI of $1,400,000. What is the equity dividend rate (ratio of first year cash flow to equity)?

A) 5.89% B) 9.33% C) 7.86% D) 8.64%

9) A property that produces a level of NOI of $200,000 per year is expected to be sold in Year 5 for $2,000,000. If the property was purchased for $2,000,000, what percent of the IRR can be attributed to the operating income only?

A) 10.0% B) 90.0% C) 37.9% D) 63.1%

10) A property that produces an annual NOI of $100,000 was purchased for $1,200,000. Debt service for the year was $95,000 of which $93,400 was interest and the remainder was principal.

Annual depreciation is $38,095. What is the taxable income?

A) $5,000 B) $6,600 C) −$31,495 D) −$33,095

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11) An investor who has $75,000 in taxable income purchases a building that produces another $15,000 in taxable income. Given the following tax brackets apply, what is the investor’s marginal tax rate?

Taxable Income $0 - $34,000 $34,001 - $82,150 Over $82,150

Marginal Tax Rate 15% 28% 31%

A) 29.50% B) 29.57% C) 28.00% D) 31.00%

12) A small office building is purchased of $1,200,000 with a balloon mortgage that is due at the end of Year 10. Payments are based on a 25-year amortization period. If one point was charged at closing, what annual amount can be deducted for tax purposes?

A) $1,200 B) $480 C) $0 D) $800

13)

Which of the following is the formula for the adjusted basis of a property?

A) B) C) D)

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Original cost + capital improvements − accumulated depreciation Sales price− mortgage balance − sales costs Sales price − accumulated depreciation Original cost − mortgage balance − sales costs

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14) A property is sold for $5,100,000 with selling costs of 3 percent of the sales price. The mortgage balance at the time of sale is $3,600,000. The property was purchased 5 years ago for $4,820,000. Annual depreciation allowances of $153,016 have been taken. If the tax rate is 28 percent, what is the after-tax cash flow from sale of the property?

A) $1,184,062 B) $969,840 C) $1,347,000 D) $1,097,218

15) A property produces an after-tax internal rate of return of 12.24 percent. If the investor has a marginal tax rate of 31 percent, what is the before-tax equivalent yield?

A) 8.45% B) 11.39% C) 16.03% D) 17.74%

16)

Which of the following includes income from real estate classified as capital assets?

A) B) C) D)

17)

Passive income Active income Portfolio income Passive activity income

Which of the following is FALSE regarding an expense stop?

A) All operating expenses are covered by the stop.

B) The passthrough is based on the tenant’s percentage of total leasable area.

C) Expenses to be included must be agreed upon and included in the lease.

D) The stop is often based on the actual amount of operating expenses at the time the lease is signed.

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18)

Which of the following is FALSE regarding expense stops?

A) B) C) D)

19)

Expense stops protect owners against increases in expenses.

Expense stops are usually based on expenses during the first term of the lease.

Expense stops can pass through expense savings to tenants.

Expense stops provide some protection against inflation.

The minimum lenders typically require for DCR in the first year is: A) 0.8.

B) 1.0.

C) 1.2.

D) 1.5.

20)

Which of the following is FALSE regarding DCR? A) B) C) D)

It indicates whether NOI is sufficient to cover mortgage payments.

It is not of concern to lenders when loan to value ratios are low.

It is an indication of risk for the lender.

It is derived from NOI divided by the mortgage payment.

21) Net sale proceeds less the adjusted basis of the property determines which of the following?

A) B) C) D)

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After-tax net present value of the property Depreciation allowance for the property Before-tax net present value of the property Capital gains or losses

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22) The general investment strategy based on a goal of acquiring existing, seasoned, relatively low-risk properties that are at least 80 percent leased to tenants with low credit risk, is: A) B) C) D)

opportunistic investing. core strategy. core "Plus" strategy. value added strategy.

23) The rate that causes the present value of all cash inflows to equal the initial investment of a project is referred to as the: A) B) C) D)

NPV. payback period.

TVM. IRR.

24) The debt coverage ratio measures the degree to which the NOI from the property is expected to exceed the mortgage payment. ⊚ true ⊚ false

25)

CPI adjustments shift the risk of unexpected inflation to the lessor. ⊚ true ⊚ false

26) Expense stops shift the risk of increases in expenses to the lessee while allowing the lessor to retain the benefit of any decrease in expenses. ⊚ true ⊚ false Version 1

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27) In making an investment decision, IRR analysis will lead to a different "go/no-go" decision than NPV analysis. ⊚ true ⊚ false

28) The equity dividend rate is an accurate measure of investment yield because it considers future cash flows. ⊚ true ⊚ false

29)

The use of a CPI index in a lease contract shifts risk to the tenant. ⊚ true ⊚ false

30)

Expense stops protect the lessee from unexpected changes in market rents. ⊚ true ⊚ false

31)

A gross lease is riskier for the lessor than a net lease. ⊚ true ⊚ false

32)

The debt coverage ratio is used by lenders to indicate the riskiness of a loan. ⊚ true ⊚ false

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33) When calculating IRR, the projected cash flows are discounted such that they will equal the initial investment amount. ⊚ true ⊚ false

34)

Property held as a personal residence cannot be depreciated. ⊚ true ⊚ false

35) Residential property is depreciated over 27.5 years whereas nonresidential property is depreciated over 39 years. ⊚ true ⊚ false

36) The deductibility of depreciation in calculating taxable income will usually cause the effective tax rate to be lower than the actual tax rate. ⊚ true ⊚ false

37) 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 of income. ⊚ true ⊚ false

38) If an individual actively participates in the management of a rental property, he may deduct the full amount of the passive activity losses from active income, regardless of his adjusted gross income.

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⊚ ⊚

true false

39) During a recessionary period, it is possible the amount of space that is absorbed by the market will be negative. ⊚ true ⊚ false

40) Operating expenses associated with the maintenance and upkeep of a residential property are generally tax deductible. ⊚ true ⊚ false

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Answer Key Test name: chapter 11 1) D 2) A 3) D 4) A 5) B 6) B 7) D 8) A 9) C 10) C 11) D 12) A 13) A 14) D 15) D 16) C 17) A 18) C 19) C 20) B 21) D 22) B 23) D 24) TRUE 25) FALSE 26) TRUE Version 1

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27) FALSE 28) FALSE 29) TRUE 30) FALSE 31) TRUE 32) TRUE 33) TRUE 34) TRUE 35) TRUE 36) TRUE 37) TRUE 38) FALSE 39) TRUE 40) FALSE Student name: 1) An investment has the following characteristics: ATIRRP: After-tax IRR on total investment in the property: 9.0% BTIRRE: Before-tax IRR on equity invested: 17% BTIRRP: Before-tax IRR on total investment in the property: 12% t: Marginal tax rate: 0.40 What would be the break-even interest rate (BEIR) at which the use of leverage is neither favorable nor unfavorable?

A) 15.0% B) 20.0% C) 22.5% D) 28.3%

2)

Under which conditions would one be MOST LIKELY to see an interest rate swap?

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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.

B) A borrower does not have enough equity for a conforming loan, so he or she takes out a "second" mortgage loan.

C) A borrower does not have enough equity for a conforming loan, so he or she "swaps" mortgage insurance for increased equity investment.

D) A bankruptcy court orders a lender to "swap" a debtor's high interest rate for a lower interest rate.

3) A lender requires a 1.20 debt coverage ratio 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?

A) $30,000 B) $50,000 C) $60,000 D) $72,000

4) All other things being equal, which of the following best describes the effects of leverage on an investment’s risk-return characteristics (assuming the expected return is greater than the lending rate)?

A) Lower expected return, lower risk B) Lower expected return, higher risk C) Higher average return, higher risk D) Higher average return, lower risk E) Risk-return characteristics have no role in investment decisions.

5) A property is financed with a 75 percent loan at 11.5 percent over 25 years. The property produces an ATIRR on total investment of 7.34 percent based on a tax rate of 31 percent. What can be said about the leverage associated with the property?

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A) B) C) D)

Negative leverage exists.

Positive leverage exits.

No leverage exists.

Leverage cannot be determined without knowing the ATIRR on equity.

6) A property produces an 8.92 percent ATIRR on the total investment considering a tax rate of 28 percent. What is the maximum interest rate that could be paid on debt without causing the leverage to be negative?

A) 12.39% B) 11.42% C) 6.42% D) 9.37%

7) A loan in which the lender receives a percentage of the net operating income from the property is known as a(n): A) B) C) D)

participation loan. accrual loan. convertible loan. percentage loan.

8) A loan in which the lender has an option to purchase an equity interest in a property is known as a(n): A) B) C) D)

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participation loan. accrual loan. convertible loan. percentage loan.

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9) Which of the following would NOT be considered an advantage that an investor might consider under a sale-leaseback of land?

A) The sale-leaseback in effect provides 100 percent financing on the land.

B) Lease payments are tax deductible.

C) The sale-leaseback provides the same depreciation deductibility with a smaller equity investment.

D) The land may appreciate over the holding period.

10)

Which of the following is also referred to as a negative amortization loan?

A) B) C) D)

Participation loan Accrual loan Convertible loan Interest-only loan

11) A lender requires a 1.20 debt coverage ratio as a minimum. If the net operating income of a property is $45,000, what annual amount of debt service would provide the required debt coverage ratio?

A) B) C) D)

$37,500 or higher $37,500 or lower $54,000 or higher $54,000 or lower

12) If properly constructed, and assuming everything but the structures of the interest payments are equal, which of the following loans would typically have the highest first-year debt service?

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A) B) C) D)

Accrual loan Conventional loan Interest-only loan Participation loan

13) A property is financed with an 85 percent loan-to-value ratio at 10 percent interest over 25 years. What would be the estimated BTIRRE on equity given that the BTIRRp is 10.75 percent?

A) 10.1% B) 10.4% C) 15.0% D) 13.2%

14)

Which of the following typically would NOT be used as a basis for a participation loan?

A) B) C) D)

15)

Increase in value over the holding period Reaching headcount reduction targets Cash flow after regular debt service Potential gross income

Which of the following is FALSE regarding interest-only loans?

A) B) C) D)

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They usually have balloon payments.

They have greater amortization than conventional loans.

They may result in more cash flow to the investor.

They may allow for a lower DCR.

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16) 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) B) C) D)

17)

Convertible loan Sale-leaseback Accrual loan Interest-only loan

Which of the following is FALSE regarding negative amortization?

A) B) C) D)

It can result in a decrease to the borrower’s equity in the property.

It usually increases default risk.

It usually has a lower interest rate than a conventional loan.

It usually results in a lower DCR.

18) Lenders for income-producing properties refer to loans that are short term and require little or no amortization as: A) B) C) D)

missile loans. straight loans.

ARM loans. bullet loans.

19) The maximum interest rate that could be paid on a debt before the leverage becomes unfavorable is referred to as the: A) B) C) D)

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incremental cost of debt. break-even interest rate. favorable interest rate. optimistic interest rate.

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20) Financial leverage is defined as 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 ⊚ false

21) To determine whether leverage is positive or negative, the investor needs to determine whether the IRR is greater than the market rate of interest on mortgage loans. ⊚ true ⊚ false

22)

One benefit of leverage is that it reduces the variation in returns or losses. ⊚ true ⊚ false

23) One benefit of leverage is that it may allow an investor to diversify across several investment properties. ⊚ true ⊚ false

24) One advantage of a sale-leaseback is that the lease payments are 100 percent tax deductible. ⊚ true ⊚ false

25)

One advantage of using leverage is that NOI increases with higher amounts of leverage. ⊚ true ⊚ false

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26) When the internal rate of return on an investment increases as the loan-to-value ratio increases, positive leverage exists. ⊚ true ⊚ false

27)

If a property has positive leverage, the owner should borrow as much as possible. ⊚ true ⊚ false

28) In an inflationary environment where property values are also rising, a participation loan may provide a lender with some protection against unanticipated inflation. ⊚ true ⊚ false

29) An interest-only loan will provide a higher debt coverage ratio than an amortizing loan with the same interest rate. ⊚ true ⊚ false

30) Everything else equal, the loan balance on a negative amortization loan will be less than that on an interest-only loan after the first year. ⊚ true ⊚ false

31) When constructing a convertible mortgage, the lender will require a contract interest rate equal to or greater than the market rate on a similar mortgage without a conversion option.

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⊚ ⊚

32)

true false

The loan alternative with the highest ATIRR will always be preferable to the borrower. ⊚ true ⊚ false

33) Properties with a higher ratio of debt are considered to also have a higher risk assuming everything else is equal. ⊚ ⊚

true false

34) If a property owner borrows money at a rate that is higher than the equity yield rate, negative leverage exists. ⊚ true ⊚ false

35) A loan in which the lender receives part of the proceeds from the sale of the property is known as a convertible loan. ⊚ true ⊚ false

36) A decrease in financial leverage would be expected to magnify the risk and the potential return of an income-producing property. ⊚ true ⊚ false

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Answer Key Test name: chapter 12 1) A 2) A 3) B 4) C 5) A 6) A 7) A 8) C 9) D 10) B 11) B 12) B 13) C 14) B 15) B 16) A 17) C 18) D 19) B 20) TRUE 21) FALSE 22) FALSE 23) TRUE 24) TRUE 25) FALSE 26) TRUE Version 1

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27) FALSE 28) TRUE 29) TRUE 30) FALSE 31) FALSE 32) FALSE 33) TRUE 34) TRUE 35) FALSE 36) FALSE Student name: 1)

Consider risk-return characteristics of Investments A-D, given above. Which of the following statements is TRUE?

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A) B) C) D)

Investment C is preferred to Investment D. Investment D is preferred over all other investments.

Investment A is preferred to Investment B. Investment B is preferred to Investment C.

2) Consider two investments: Investment 1 has a 50 percent chance of producing a return of zero and a 50 percent chance of producing a return of 40 percent.

Investment 2 has a 50 percent chance of producing a return of 10 percent and a 50 percent chance of producing a return of 30 percent.

Which of the following statements regarding the investments is TRUE? A) B) C) D) returns.

3)

Investment 1 is riskier than Investment 2.

Investment 2 is riskier than Investment 1.

Investment 1 and Investment 2 have the same amount of risk.

Investment 1 is a better investment because it has the potential to produce the highest

Which of the following is NOT a component of lease rollover risk?

A) B) C) D)

Commissions paid to a leasing agent to find a new tenant Costs of tenant improvements demanded by new tenants Liquidity risk Reduced revenues from vacancy until a new tenant is found

4) Consider an investment in which a developer plans to begin construction of a building that will cost $1,000,000 in one year if, at that point, rent levels make construction feasible.

There is a 50 percent chance that NOI will be $160,000 and a 50 percent chance that NOI will be $80,000. Using the traditional approach, which is similar to the "highest and best use" approach, what will the land value of the property be at the completion of the construction, assuming a cap rate of 10 percent (12 percent discount rate and an NOI growth rate of 2 percent)?

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A) $120,000 B) $200,000 C) $300,000 D) $833,333

5) Consider an investment in which a developer plans to begin construction of a building that will cost $1,000,000 in one year if, at that point, rent levels make construction feasible.

There is a 50 percent chance that NOI will be $160,000 and a 50 percent chance that NOI will be $80,000. Assuming a cap rate of 10 percent (12 percent discount rate and an NOI growth rate of 2 percent) what would the land value be at the completion of the construction under the real options approach?

A) $120,000 B) $200,000 C) $300,000 D) $833,333

6)

Risk due to potential tax law changes is referred to as: A) B) C) D)

business risk. financial risk. legislative risk. tax risk.

7) When an investor performs an investigation while considering acquisition of a property, this is referred to as: A) B) C) D)

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investigation. risk analysis. due diligence. acquisition analysis.

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8) Which of the following refers to the risk real estate investors face stemming from changes in general economic conditions?

A) B) C) D)

9)

Financial risk Liquidity risk Environmental risk Business risk

Which of the following BEST describes the process of "partitioning the IRR"?

A) Dividing the IRR into income and appreciation components B) Using the IRR as a discount rate and determining how much of the present value comes from income and resale C) Dividing the IRR into before-tax and after-tax IRRs D) Determining how much of the IRR comes from each property in a portfolio

10) When sales exceed a breakpoint sales volume in a retail lease with percentage rent, the additional rent is referred to as: A) B) C) D)

retail rent. participation rent. overage rent. sales rent.

11) Which of the following may be used as a market leasing assumption (including a renewal probability) in an analysis related to a lease renewal?

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A) B) C) D)

Market rent paid after the existing lease ends.

Vacancy after the existing lease ends.

Leasing commissions paid after the existing lease ends.

All of the choices are correct.

12) If the renewal probability for a lease is assumed to be 60 percent and the number of months vacant would be 12 months if the lease is not renewed, what is the expected vacancy at the end of the lease?

A) B) C) D)

13)

4.8 months 7.2 months 9.0 months 12.0 months

Which of the following best describes the approach to valuing land as a "real option"?

A) The land value reflects the fact that the developer can wait to decide whether to construct a building on the site.

B) The seller provides the investor with an option to purchase the land at a specific price before a certain date.

C) The land is valued at its most probable use.

D) The seller has an option to repurchase the land from the buyer before construction takes place.

14)

Which of the following is an example of a "real option" in an investment decision?

A) B) C) D)

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Valuation of vacant land.

Valuation of projects with phases of development.

Valuation of a building that can be renovated.

All of the choices are correct.

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15) An investor is analyzing the risk of a possible investment by producing three different scenarios. Under a pessimistic scenario, the property would produce a BTIRRp of 8 percent; a most-likely scenario would produce a BTIRRp of 12 percent; and an optimistic scenario would produce a BTIRRp of 16 percent. The investor assigns the pessimistic scenario a 25 percent chance of occurring, the most-likely case a 60 percent chance of occurring, and the optimistic scenario a 15 percent chance of occurring. What is the standard deviation of the returns?

A) 0.062% B) 1.248% C) 2.498% D) 2.904%

16)

Which of the following increases with use of leverage in a business?

A) B) C) D)

Financial risk Liquidity risk Environmental risk Inflation risk

17) Which of the following would be most suitable for use in analyzing the best-case, worstcase, and most-likely outcomes for a potential investment opportunity?

A) B) C) D)

Risk analysis Financial analysis Sensitivity analysis Cost analysis

18) A property owner may incur some downtime due to the expiration of a lease that has not been renewed. The time period that occurs before the owner can contract with a new tenant is referred to as:

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A) B) C) D)

absentia turnover. market turnover. lease turnover. vacancy turnover.

19) Partitioning the internal rate of return is useful because it helps the investor to determine how much of the return is from annual operating cash flow and how much is from the projected resale cash flow. ⊚ true ⊚ false

20) In general, investors are assumed to be risk seekers who must be compensated more for the higher risk of some investments. ⊚ true ⊚ false

21)

Financial risk increases as the amount of debt increases. ⊚ true ⊚ false

22)

Real estate that is not leveraged is not affected by interest rate risk. ⊚ true ⊚ false

23)

Real estate is generally dramatically affected by inflation risk. ⊚ true ⊚ false

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24)

Use of leverage always increases the amount of business risk. ⊚ true ⊚ false

25)

The range of returns (highest to lowest) is the most common risk measure. ⊚ true ⊚ false

26)

The term "due diligence" refers to conducting an investigation before buying a property. ⊚ true ⊚ false

27)

Land can be viewed as having an "option" to develop the land. ⊚ true ⊚ false

28)

Percentage rent is common in office building leases. ⊚ true ⊚ false

29)

The term "financial risk" refers to the probability of interest rates changing. ⊚ true ⊚ false

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30) In general, real estate is usually considered more risky than bonds but less risky than stocks. ⊚ true ⊚ false

31) A property with a higher standard deviation and a higher return is preferable to a property with a lower standard deviation and a lower return. ⊚ true ⊚ false

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Answer Key Test name: chapter 13 1) D 2) A 3) C 4) B 5) C 6) C 7) C 8) D 9) B 10) C 11) D 12) A 13) A 14) D 15) C 16) A 17) C 18) D 19) TRUE 20) FALSE 21) TRUE 22) FALSE 23) FALSE 24) TRUE 25) FALSE 26) TRUE Version 1

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27) TRUE 28) FALSE 29) FALSE 30) TRUE 31) FALSE Student name: 1)

The marginal rate of return for a property is the: A) B) C) D)

2)

APR on an incremental amount of borrowing. expected holding period return earned when the investor purchases the property. return earned on subprime property relative to prime property. return gained by holding the property for one additional year.

Which of the following is NOT a typical benefit of renovating a property?

A) B) C) D)

Increasing rents Lowering vacancy Increasing operating expenses Increasing the future property value

3) Consider the information in the table below. What is the marginal rate of return for keeping the property one additional year?

If sold today Sale price Mortgage balance Capital gain tax Cash flow NOI over next year

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$ 2,500,000 1,000,000 112,500 $ 1,387,000

If sold next year $ 2,650,000 900,000 135,000 $ 1,615,000 $ 50,000

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A) 16.4% B) 20.0% C) 26.4% D) 33.2%

4) Consider the information in the table below. What is the rate of return the investor would earn on the additional funds invested in renovating the property, assuming that the investor would not borrow any additional funds?

After-tax cash flow from operations if renovated After-tax cash flow from operations if not renovated Incremental cash flow from operations Sale proceeds if renovated Sale proceeds if not renovated Incremental cash flow from sale Renovation costs

$ 75,000 − 60,000 $ 15,000 $ 2,500,000 2,250,000 $ 250,000 $ 250,000

A) 6.0% B) 16.0% C) 66.0% D) 106.0%

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5)

Consider the figure below. Which of the following does the dotted (vertical) line denote?

A) B) C) D)

Incremental rate of return on additional borrowed funds Marginal rate of return Optimal holding period Optimal yield

6) 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 percent rate of return by investing the sales proceeds today in a different project?

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A) B) C) D)

Sell the property and invest proceeds in the second property Do not sell the property Renovate the property Cannot be determined without knowing the cash flow from the second property

7) 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 percent 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%

8) Which of the following factors would NOT be considered when an investor is trying to decide whether to hold or sell a property at the end of Year 5?

A) B) C) D)

After-tax operating income in Year 5 After-tax cash flow from the sale in Year 5 After-tax cash flow from the sale in the future After-tax operating income after Year 5

9) A property worth $16 million can be refinanced with an 80 percent loan at 9.5 percent over 20 years. The balance on the current loan is $12,148,566. Loan payments are $113,302 per month. The loan balance in 10 years will be $8,396,769. If the property is expected to be sold in 10 years, what is the incremental cost of refinancing?

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A) 9.71% B) 10.36% C) 12.42% D) 14.58%

10) An investor is considering renovating a building. The total cost of renovation is expected to be $100,000, of which 75 percent can be borrowed. Given the after-tax cash flows to the equity investor as shown below, what is the incremental return from renovating?

1

2

3

4

5

ATCF after renovation

9,200

10,000

12,000

14,000

316,000

ATCF-no renovation

10,000

10,200

10,440

10,680

160,900

A) 9.75% B) 10.14% C) 15.32% D) 12.67%

11) Which of the following represents the formula for the annual marginal rate of return (MRR) when trying to decide whether to hold or sell a property (ATCFS equals the after-tax cash flow from sale and ATCFO equals the after-tax cash flow from operations)?

A) MRR = [ATCFS (Year t + 1) + ATCFO (Year t + 1) − ATCFS (Year t) − ATCFO (Year t)]/ATCFS (Year t) B) MRR = [ATCFS (Year t + 1) − ATCFO (Year t + 1) + ATCFS (Year t)] /ATCFS (Year t) C) MRR = [ATCFS (Year t + 1) + ATCFO (Year t + 1) − ATCFS (Year t)]/ATCFS (Year t) D) MRR = [ATCFS (Year t + 1) + ATCFO (Year t + 1) + ATCFS (Year t)]/ATCFS (Year t)

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12) Which of the following would be considered when an investor is trying to decide whether or not to renovate a property?

A) B) C) D)

After-tax operating income before renovation The difference between future operating income if renovated and if not renovated After-tax cash flow from sale the year of renovation The mortgage balance on the property the year before renovation

13) An investor is considering refinancing a property. The current mortgage has an interest rate of 8.75 percent and a mortgage balance equal to 45 percent of the property value due to amortization of the loan and some appreciation in value. However, the investor would like to refinance at an amount equal to 75 percent of the property value. He has found out that the property can be refinanced at a 75 percent loan-to-value ratio for 9.5 percent interest over 15 years. What can be said about the incremental cost of refinancing?

A) B) C) D)

It will be higher than 9.5 percent.

It will be less than 9.5 percent.

It will be equal to 9.5 percent.

Nothing can be determined without additional information.

14) An investor purchased a building in 1982 when the building could be depreciated over 15 years. Assume it is 1992 today. A new investor is interested in purchasing the building in 1992 when the depreciable life according to tax laws is 31.5 years. Assuming both investors are in the same tax bracket and that everything else is equal, what can be said about the after-tax cash flow received by the new investor as compared to the after-tax cash flow that would be received by the original owner of the building?

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A) The new investor will have a higher after-tax cash flow because the depreciation expense will be lower.

B) The new investor will have a higher after-tax cash flow because the depreciation expense will be higher.

C) Both investors will have to use the 31.5 year depreciable life after 1986 so the aftertax cash flow will be equal.

D) The new investor will have a lower after-tax cash flow because the depreciation expense will be lower.

15)

The marginal rate of return can be defined as the: A) B) C) D)

16)

return that results from holding the property for one additional year.

IRR the year the internal rate of return starts to decrease from holding the property. incremental return over a holding period resulting from renovating a property. rate of return at which the net present value equals zero.

Disposition when dealing with real estate means which of the following?

A) B) C) D)

The way a property fits in with its surroundings Refinancing the property Improving the property value Sale of the property

17) The return calculated assuming the property is held for one additional year is referred to as the: A) B) C) D)

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after-tax cash flow from sale. marginal rate of return. reinvestment rate. institutional rate.

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18)

A property should be sold when which of the following occurs?

A) B) C) D)

19)

The marginal rate of return is rising and higher than the reinvestment rate The marginal rate of return is constant The marginal rate of return is zero The marginal rate of return is falling and becomes equal to the reinvestment rate

Which of the following is NOT a benefit of refinancing?

A) B) C) D)

The investor can increase financial leverage It is an alternative to sale of the property Risk is decreased No taxes have to be paid on funds received by additional borrowing

20) A property sale in which the buyer may make payments over time instead of paying the full price at the time of purchase is referred to as a(n): A) B) C) D)

21)

like kind sale. carryover sale. equivalent investment sale. installment sale.

In a real estate transaction, gross profit divided by the contract price is referred to as the: A) B) C) D)

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net profit. operating profit. profit ratio. mortgage profit.

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22) One factor an investor should consider when trying to decide whether to dispose of a property he or she has owned for several years is the expected IRR for holding versus sale of the property. ⊚ true ⊚ false

23)

Increasing rents tend to increase the marginal rate of return on a property. ⊚ true ⊚ false

24) A property should be sold when the marginal rate of return rises above the rate at which funds can be reinvested. ⊚ true ⊚ false

25) One disadvantage of refinancing a property instead of selling the property is that taxes must be paid on funds received by additional borrowing, but no taxes would have to be paid if the property is sold. ⊚ true ⊚ false

26)

Equity buildup represent the opportunity costs of keeping a property. ⊚ true ⊚ false

27) 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.

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⊚ ⊚

true false

28) The benefits of equity buildup in a property are lessened over time because with an amortizing mortgage, an investor will lose some tax benefits each year as the interest portion of the payments decreases. ⊚ true ⊚ false

29) An investor purchased a property expecting to receive a 14 percent rate of return.

However, the rate of return on the property over a 5-year holding period turned out to be only 11.5 percent. Therefore, the property should be sold. ⊚ true ⊚ false

30) Given the same expectations for future rents and expenses, a new buyer may earn a different after-tax return than the current owner of the same property. ⊚ true ⊚ false

31)

In general, equity buildup tends to lower the marginal rate of return of holding a property. ⊚ true ⊚ false

32) An investor calculates an incremental return of renovating a building of 14 percent. Other properties provide a 12.5 percent overall rate of return to equity investors. Therefore, the property is a good investment. ⊚ true ⊚ false

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33) If a real estate tax law becomes more favorable, this generally benefits existing investors over new investors. ⊚ true ⊚ false

34) The marginal rate of return on a property usually increases until the sale of the property.

Equity buildup should always be avoided if possible. ⊚ true ⊚ false

35) A property should be sold when the marginal rate of return falls below the rate at which funds can be reinvested. ⊚ true ⊚ false

36) For refinancing to be profitable, the effective cost of the debt must be less than the unlevered return on the projects being financed. ⊚ true ⊚ false

37) The investment foundation of a real estate investment is another name for the initial investment. ⊚ true ⊚ false

38) If an investor is deciding whether to sell a property, his equity buildup in the existing property should be considered as an opportunity cost.

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⊚ ⊚

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Answer Key Test name: chapter 14 1) D 2) C 3) B 4) A 5) C 6) B 7) A 8) A 9) C 10) A 11) C 12) B 13) A 14) D 15) A 16) D 17) B 18) D 19) C 20) D 21) C 22) TRUE 23) TRUE 24) FALSE 25) FALSE 26) TRUE Version 1

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27) FALSE 28) TRUE 29) FALSE 30) TRUE 31) TRUE 32) FALSE 33) FALSE 34) FALSE 35) TRUE 36) TRUE 37) FALSE 38) TRUE Student name: 1) For which of the following reasons would a business prefer to own real estate rather than lease it?

A) Owning is better than leasing if the business demands specialized or unique facilities.

B) Owning allows the business to develop skills in operating, maintaining, and repair of real estate and the associated facilities.

C) Owning reduces operating flexibility.

D) The capital commitments with owning are lower than the capital commitments associated with leasing.

2) Why might it be argued that corporations do not have a comparative advantage when investing in real estate as a means of diversification from the core business?

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A) Corporations cannot react as quickly as individual investors to changes in market conditions.

B) Corporations do not typically hold real estate in a large number of geographic areas and may not hold a variety of different types of properties.

C) Corporations often use property managers who do not understand financial markets.

D) Diversification dilutes a corporation’s risk-return profile and does not provide an advantage to corporations.

3) A company is planning to move to a larger office and is trying to decide if the new office should be owned or leased. Cash flows for owning versus leasing are estimated as follows.

Assume that the cash flows from operations will remain level over a 10-year holding period. If purchased, the company will invest $385,000 in equity and finance the remainder with an interest-only loan that has a balloon payment due in Year 10. The after-tax cash flow from sale of the property at the end of Year 10 is expected to be $750,000. What is the incremental rate of return on equity to the company if the property is owned instead of leased?

Own

Lease

Sales Cost of goods sold Gross income Operating expenses:

1,000,000 500,000 500,000

1,000,000 500,000 500,000

Business Real estate Lease payments Interest Depreciation Taxable income Tax Income after tax Plus: Depreciation After-tax cash flow

130,000 60,000 0 90,000 35,000 185,000 55,500 129,500 35,000 164,500

130,000 60,000 120,000 0 0 190,000 57,000 133,000 0 133,000

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A) 17.99% B) 13.26% C) 10.32% D) 12.62%

4) Which of the following factors does NOT represent an effect of corporate real estate ownership on corporate financial statements?

A) The unrealized source of potential gain from the sale of property is not represented on annual income statements.

B) Income represented on accounting statements may underestimate the actual cash flows provided by property.

C) The book value of property on the balance sheet may not represent the actual market value.

D) The corporation's overall debt ratio may be reduced, and property is carried at book value but financed at market value.

5) Which of the following conditions will NOT cause a lease to be categorized as a finance lease?

A) It extends for at least 65 percent of the asset's life.

B) It transfers ownership to the lessee at the end of the lease term.

C) It contains a purchase option on the asset that is reasonably certain to be exercised.

D) The present value of the contractual lease payments equals or exceeds 90 percent of the fair market value of the asset at the time the lease is signed.

6) A company sells an office building that has appreciated in value and subsequently leases the space. Which of the following scenarios represents an impact that sale-leasebacks may have on corporate financial statements?

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A) B) C) D)

Lower total income will be realized in the year of sale because of capital gains tax.

Higher taxable income will be realized in the year of sale because of a gain on sale.

Earnings per share increases because the mortgage has been paid off.

Higher taxable income will be realized because lease payments cannot be deducted.

7) Which of the following does NOT represent a potential benefit of selling and leasing back a property?

A) B) C) D)

8)

Provides a source of capital Returns excess capital to investors Demonstrates the value of the real estate to the marketplace Increases the firm's depreciation deductions

The cash flows considered in a sale-leaseback analysis are:

A) purchase price, differences in operating expenses over the holding period, and cash flow from future sale.

B) purchase price, lease payments, and cash flow from future sale.

C) cash flow from sale, differences in future cash flow from operations, and potential cash flow from future sale.

D) cash flow from sale, future lease payments, and differences in future operating expenses.

9)

The cash flows considered in a lease versus own analysis are:

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A) purchase price, difference in cash flow from operations over the holding period, and cash flow from sale.

B) purchase price, lease payments, and cash flow from future sale.

C) cash flow from sale, differences in future operating expenses, and cash flow from future sale.

D) cash flow from sale, future lease payments, and differences in future operating expenses.

10) All other factors being equal, a company would prefer to own rather than lease under which of the following conditions?

A) The expected life of an asset far exceeds the company's projected period of use.

B) The real estate investment represents a large proportion of the company's total capital.

C) The corporate needs for the property are not highly sensitive to the level of maintenance.

D) The corporation needs a specialized research and development building.

11) Which of the following is likely to be affected if a corporation acquires a parcel of real estate?

A) B) C) D)

Cash flow Corporate liquidity Corporate risk All of the choices are correct.

12) It is estimated that corporate users control as much as commercial real estate.

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A) 10 B) 25 C) 75 D) 100

13) When doing a sale versus lease analysis, how should the residual value of the property be estimated?

A) B) C) D)

Assume it is worthless Set it equal to the book value of the property Assume it is equal to the original purchase price Assume it is equal to the market value of the real estate

14) Which of the following statements is TRUE for a corporation with a high credit rating considering owning versus leasing corporate real estate?

A) The company should probably use a mortgage.

B) The company may be able to issue corporate debt at a more favorable rate than it could obtain with a mortgage.

C) The company is probably better off leasing the property from someone with a lower credit rating.

D) The company's credit rating does not affect the own versus lease decision.

15)

Which of the following statements is FALSE regarding operating leases?

A) The present value of the lease payments exceeds 90 percent of the value of the leased asset are recorded as the present value of the lease on the balance sheet.

B) They require recognition on the balance sheet for public companies.

C) They must not extend for more than 75 percent of the asset's life.

D) Ownership is not transferred to the tenant at the end of the lease term.

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16) The real estate activities of firms that only use real estate as part of their business operations are commonly referred to as: A) B) C) D)

corporate real estate. real estate analysis. business real estate. real estate finance.

17) For a large corporation with a good credit rating seeking to finance corporate real estate, the cost of a mortgage loan may be greater than the cost of unsecured corporate debt. ⊚ true ⊚ false

18) Because real estate is shown on the corporation’s books at its historical cost less book depreciation, the value of corporate real estate is often considered "hidden" from shareholders. ⊚ true ⊚ false

19) Because real estate usually declines in value faster than accounting depreciation, it is reasonable to assume that the property has zero value at the end of the lease term. ⊚ true ⊚ false

20) A company estimates that the incremental cost of owning a parcel of real estate vs. leasing will be 10 percent. The company expects a 12 percent rate of return on investments.

Therefore, real estate should be owned and not leased. ⊚ true ⊚ false

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21) 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. ⊚ true ⊚ false

22) Similar to decisions about owning or leasing equipment, the decision to own or lease a property is basically just a choice between two financing alternatives. ⊚ true ⊚ false

23) The residual value at the end of the holding period should be based on the market value of the real estate and not the book value. ⊚ true ⊚ false

24) Nonrecourse debt, such as a mortgage on a specific property, typically has a lower rate than the unsecured debt of companies with high credit ratings. ⊚ true ⊚ false

25)

For public companies, an operating lease does not affect a corporate balance sheet. ⊚ true ⊚ false

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26) Because accounting depreciation charges often exceed the true economic depreciation of real estate, the earnings of companies owning real estate typically understate the level of operating cash flow. ⊚ true ⊚ false

27) A company can diversify its business activities by developing, owning, and subsequently leasing real estate to other companies. Because of the diversification benefits, shareholder value is always increased. ⊚ true ⊚ false

28) If the incremental cash flows from owning versus leasing are compared without explicitly considering debt financing, these returns should be compared to the firm’s cost of equity. ⊚ true ⊚ false

29) 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. ⊚ true ⊚ false

30) If a company's management is unsure of how long it will need the use of a real estate asset, it is likely that the company will lease the property. ⊚ true ⊚ false

31) If a company decides to lease a piece of real estate, it will typically arrange for offbalance-sheet financing for the payments since they will be tracked on the income statement and not on the balance sheet.

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⊚ ⊚

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164

Answer Key Test name: chapter 15 1) A 2) B 3) B 4) D 5) A 6) B 7) D 8) C 9) A 10) D 11) D 12) C 13) D 14) B 15) A 16) A 17) TRUE 18) TRUE 19) FALSE 20) FALSE 21) FALSE 22) FALSE 23) TRUE 24) FALSE 25) FALSE 26) TRUE Version 1

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27) FALSE 28) FALSE 29) TRUE 30) TRUE 31) FALSE Student name: 1)

A permanent take-out commitment is:

A) a way to increase NOI for projects with large debt service obligations.

B) an agreement by a lender to provide permanent financing for a property once construction is complete, provided all of the contingencies have been met.

C) another term for a construction loan.

D) the same thing as an acquisition and development loan.

2) Which of the following is one reason that construction lenders typically prefer the cost approach to valuation over the income approach?

A) The cost approach provides a more conservative estimate of value.

B) The cost approach provides a more optimistic estimate of value.

C) The cost approach is a good indication of the expected value of an income-producing property once construction is complete and it has been leased up.

D) The cost approach is a better estimate of actual market value of the project.

3) Units Gross Revenue Vacancy Expenses Net Operating Income Cost

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275 $ 3,267,000 163,500 1,143,450 $ 1,960,200 $ 22,000,000

300 $ 3,564,000 178,200 1,247,400 $ 2,138,400 $ 22,800,000

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Consider the table above. An investor-developer demands a return of at least 9 percent 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 returns, but the 275-unit project produces a higher return than the 300-unit project.

4)

Which of the following is the usual progression for a real estate development project?

A) B) C) D)

5)

Land acquisition, completion, management, sale, construction Land acquisition, construction, completion, management, sale Land acquisition, construction, completion, sale, management Land acquisition, management, construction, completion, sale

Which of the following is a "soft cost" of construction?

A) B) C) D)

The cost of the architectural drawings The cost of pouring the foundation The cost of erecting the building The cost of finishing the interior space

6) Permanent funding commitments usually contain many funding contingencies. Which of the following typically is NOT one of those contingencies?

A) B) C) D)

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Approval of all employees hired to work at the site Approval of design changes or building material substitution Expected percentage of occupancy upon completion The expected date of project completion

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7)

Permanent loans usually refer to financing: A) B) C) D)

8)

at local coffers for the lease-up period for construction and all subsequent periods for construction, lease-up, and one or two subsequent years

The MOST common method of distributing funds provided by a construction loan is a:

A) single lump sum of money at the closing of the loan.

B) single lump sum of money at the end of the construction project to reimburse the developer for the project's expenses and profit.

C) series of payments throughout the construction project to reimburse the developer for costs incurred since the previous payment.

D) series of payments throughout the construction project to reimburse the developer for anticipated expenses in the upcoming period.

9) In comparison to permanent financing, the rates and rate variability for a construction loan would be which of the following?

Interest Rate (A) (B) (C) (D)

High High Low Low

A) B) C) D)

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Interest Rate Variability Steady Fluctuating Steady Fluctuating

Option A Option B Option C Option D

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10)

Interest on a construction loan is usually paid: A) B) C) D)

upfront at the beginning of the loan. periodically over the life of the loan. in quarterly installments over the life of the loan. at the end of the loan.

11) Besides an estimate of costs, a construction loan submission package includes many other components. Which of the following is NOT one of those components?

A) B) C) D)

12)

Two years of prior tax returns Current financial statements Pro forma operating statements Ratio and sensitivity analysis

In the context of a lease, percentage rents generally indicate that:

A) the tenant will pay a proportionate amount of rent for his space in comparison to the total net rentable area.

B) in addition to a base rent, the lessor will receive a percentage of the tenant's cash flow above some break-even point.

C) the tenant will pay a rent that is a certain percentage of the national average D) None of the choices are correct.

13) Why would a developer be willing to manage a completed project even after it has been sold?

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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 charged 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 choices are correct.

14) Which of the following is NOT one of the development strategies that may be used by developers?

A) B) C) D)

15)

Selling and leasing back the land for the development.

Owning and managing the real estate after sale.

Selling the real estate after lease-up phase.

Developing the real estate for lease in master-planned development.

Which of the following is FALSE regarding a construction loan?

A) B) C) D)

It usually has a lower rate than does permanent financing.

It is also known as an interim.

Hard costs can usually be financed.

The entire land cost cannot usually be financed.

16) Which of the following common contingencies is NOT usually included with a permanent financing agreement?

A) B) C) D)

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Completion date for construction phase Expected percentage of occupancy Materials used in construction phase Cleanliness of work area

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17) What term applies to third-party financing that is used between funds advanced by the permanent lender and funds needed to repay the construction loan?

A) B) C) D)

18)

Interim loan Mini-perm financing Gap financing Partial financing

Developers usually hold back about A) B) C) D)

percent of each progress payment.

1 10 25 75

19) ADL lenders recognize that too much of which of the following may lead to significant overbuilding and an excess supply of space in a local market?

A) B) C) D)

Speculative, closed-ended construction lending Speculative, open-ended construction lending Planned, closed-ended construction lending Planned, open-ended construction lending

20) When commercial banks consider construction loans, their analysis is generally based on which of the following?

A) B) C) D)

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Hard and soft costs Hard costs, soft costs, and site location Hard costs, soft costs, and appraised value Hard costs and site location

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21) In determining whether a project is commercially viable given the prevailing market rents, land prices, and construction and financing costs, a developer would be likely to conduct a(n): A) B) C) D)

feasibility analysis. submarket analysis. economic analysis. multivariate analysis.

22) One of the risks of project development is "project risks," which are the result of unexpected changes in general market conditions affecting the supply and demand for space. ⊚ true ⊚ false

23) In general, developers must get a construction loan before they can line up permanent (long-term) financing that will be used once the project is complete and is in operation with tenants. ⊚ true ⊚ false

24) A take-out commitment is a construction loan that, in effect, becomes permanent financing when construction is complete. ⊚ true ⊚ false

25) Holdbacks are used by construction lenders to be sure that a developer has met all obligations before all of the funds from the construction loan are given to the developer. ⊚ true ⊚ false

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26) The demand for retail space should be examined in terms of the characteristics of the tenant's demand in a given market. ⊚ true ⊚ false

27) Construction loans provide the money to construct a building and are usually provided by life insurance companies or pensions funds. ⊚ true ⊚ false

28) Permanent loans generally provide the money to pay off the construction loan in segments as the work progresses. ⊚ true ⊚ false

29) Commitments for construction financing are usually contingent on commitments for permanent financing. ⊚ true ⊚ false

30)

Permanent financing commitments usually allow the lender to approve major leases. ⊚ true ⊚ false

31) Lenders typically finance the development of a project as a percentage of completed appraised value, including the price of the site.

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⊚ ⊚

true false

32) Even after obtaining permanent financing, a developer still maintains the right to alter a project’s design or the level of expenditures. ⊚ true ⊚ false

33) Generally, as the cost of a site increases, so do the quality and the density of the improvements constructed on it. ⊚ true ⊚ false

34) Loans made under the assumption that markets will turn around are referred to as spec loans. ⊚ true ⊚ false

35) A standby commitment differs from a permanent take-out commitment in that neither party really expects the standby commitment to be used by the developer. ⊚ true ⊚ false

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Answer Key Test name: chapter 16 1) B 2) A 3) C 4) B 5) A 6) A 7) D 8) C 9) B 10) D 11) A 12) B 13) D 14) A 15) A 16) D 17) C 18) B 19) B 20) C 21) A 22) FALSE 23) FALSE 24) TRUE 25) TRUE 26) TRUE Version 1

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27) FALSE 28) FALSE 29) TRUE 30) TRUE 31) FALSE 32) FALSE 33) TRUE 34) FALSE 35) TRUE Student name: 1) Consider the feasibility study shown in the table. What is the return on total cost for the proposed project?

Total sales revenue Less: Development cost Less: Land asking price Potential gross profit Less: Administration, legal, commissions, etc.

$ 10,000,000 6,000,000 1,000,000 $ 3,000,000 1,500,000

Potential net profit

$ 1,500,000

A) 15.0% B) 17.6% C) 21.4% D) 150.0%

2) Consider the feasibility study shown in the table. You have been advised that sales revenues may be 10 percent lower and/or development costs may be 10 percent higher.

Performing a sensitivity analysis, you conclude which of the following?

Total sales revenue Less: Development cost Less: Land asking price Potential gross profit Less: Administration, legal, commissions, etc.

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$ 10,000,000 6,000,000 1,000,000 $ 3,000,000 1,500,000

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Potential net profit

$ 1,500,000

A) A 10 percent decrease in sales revenues would have a bigger impact on returns than a 10 percent increase in development costs.

B) A 10 percent increase in development costs would have a bigger impact on returns than a 10 percent decrease in sales revenues.

C) A 10 percent increase in development costs and a 10 percent decrease in sales revenues would have opposite impacts on returns, canceling each other out and having no impact on returns.

D) Both factors would have such a small impact that there is no reason to be concerned about either a 10 percent increase in development costs or a 10 percent decrease in sales revenues.

3) Consider the table, which summarizes monthly construction draws and sales revenues.

What is the percentage of lot sales revenue that needs to be used to repay the loan?

Month 1

Construction Draw $ 200,000

2

150,000

3

75,000

4 Total Present value @ 12%

25,000 $ 450,000 $ 441,883

Sales Revenue

$ 600,000 $ 600,000 $ 576,588

A) 4.0% B) 75.0% C) 76.6% D) 33.3%

4) The land development industry is best characterized by which of the following statements?

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A) The land development industry is dominated by relatively few national competitors.

B) The land development industry is highly fragmented, localized, and extremely competitive.

C) Land development and project development are synonymous.

D) The production technologies and market risks involved in land development are essentially the same as those in project development.

5) Which of the following is the MOST LIKELY sequence of events in the land development process?

A) Inspect site, perform feasibility analysis, implement marketing program, purchase land and begin construction of improvements B) Inspect site, purchase land and begin construction of improvements, perform feasibility analysis, implement marketing program C) Inspect site, perform feasibility analysis, purchase land and begin construction of improvements, implement marketing program D) Purchase land, perform feasibility analysis, perform preliminary market study, begin construction of improvements, implement marketing program

6)

Generally, which of the following is FALSE regarding an option contract?

A) An option contract allows the developer to perform a preliminary market study and feasibility analysis.

B) If the developer decides to purchase a property, the price of an option is applied towards the price of the property.

C) If the developer decides not to purchase the property, the landowner will refund any money paid for the option.

D) An option contract provides the developer with the assurance that a property will not be sold over the course of the option period.

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7) Each parcel of land in a new development is selling for $15,000 and the total project revenue is estimated to be $5,000,000. The project lender has stated that the loan should be paid off when 80 percent of the total project revenue has been earned. The total loan amount is $3,500,000. What is the release price for each parcel?

A) $8,400 B) $12,000 C) $12,750 D) $13,125

8) Which of the following might impact the density of housing in a land development project?

A) B) C) D)

The price paid for the land by the developer The terrain of the land The target market’s preferences regarding density All of the choices are correct

9) Which of the following costs should NOT be included in a net present value analysis of a land development project?

A) B) C) D)

Land purchase price Property tax General overhead such as personnel costs Developer’s profit

10) When financing land development, the lender generally requires the developer to submit which of the following?

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A) B) C) D)

A detailed breakdown of project cost Required zoning changes Bank references for the general contractor to be used on the project All of the choices are correct

11) A transaction in which two firms trade individual financing advantages to produce more favorable borrowing terms for each is known as a(n): A) B) C) D)

interest rate swap. sequential short hedge. cross hedge. sequential long hedge.

12) Generally, which of the following is FALSE regarding interest rate risk management techniques?

A) Borrowers can protect themselves from upward movements in interest rates by using interest rate caps.

B) Borrowers can protect themselves from upward movements in interest rates by using interest rate futures contracts.

C) Borrowers can benefit from downward movements in interest rates by using interest rate caps.

D) Borrowers can benefit from downward movements in interest rates by using interest rate futures contracts.

13)

An analysis of whether land can be purchased and developed profitably is known as: A) B) C) D)

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financial analysis. a feasibility study. a turnkey study. project profitability analysis.

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14)

The amount to be paid to the lender from each lot sale is included in the: A) B) C) D)

release schedule. development agreement. cost breakdowns. subcontracts.

15) Which of the following does NOT contribute to the complication of estimating the amount of interest carry?

A) The loan is taken down in draws and interest is calculated only as funds are drawn down.

B) Revenue from each type of site varies.

C) The rate of repayment of a loan depends on when the parcels are actually sold.

D) Development loan interest rates are usually fixed while market rates fluctuate.

16)

Which of the following is FALSE regarding the release price?

A) B) C) D)

It is usually calculated to pay off the loan when the last lot is sold.

It is usually calculated to pay off the loan before the last lot is sold.

Increasing the release price usually lowers the lender’s risk.

Increasing the release price is likely to lower the investor’s initial cash flow.

17) If a developer constructs some speculative buildings in hopes of identifying purchasers after completion, this is referred to as developing: A) B) C) D)

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in a feasibility construction. on a turnkey basis. on a build-to-suit basis. in optional construction.

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18) Since land development projects sometimes run behind schedule due to development problems or slow sales of parcels, lenders generally require which of the following in the initial contract?

A) B) C) D)

Subcontractor holdbacks Title extensions Extension agreements Releases from liability

19) Option contracts are used to reserve a parcel of land so that it will not be sold to someone else while the developer does preliminary analysis of the site. ⊚ true ⊚ false

20) Lenders typically insist on a loan repayment rate that is equal to the rate for which parcels are expected to sell. ⊚ true ⊚ false

21)

The release price is the dollar amount of a loan that must be repaid when a lot is sold. ⊚ true ⊚ false

22) A feasibility study analyzes whether a tract of land can be purchased and developed profitably. ⊚ true ⊚ false

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23) An option contract does not preclude the landowner from selling the property to someone else after the expiration date of the option. ⊚ true ⊚ false

24)

The release schedule refers to a schedule of expiring leases for existing tenants. ⊚ true ⊚ false

25) By using an option contract, a developer may profit from an appreciation in the property’s value over the option period. ⊚ true ⊚ false

26) In most instances, a developer's repayment rate is set so that the development loan will be repaid at the exact point that 100 percent of total project revenue is realized. ⊚ true ⊚ false

27) 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. ⊚ true ⊚ false

28) A lender does not usually require a developer to submit a schedule of estimated cash flows prior to approving a land development loan.

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⊚ ⊚

true false

29) A developer must sell all lots in a development project and repay the entire development loan before any of the new property owners can receive a clear title. ⊚ true ⊚ false

30) In order to obtain a land development loan, the developer is usually required to purchase title insurance. ⊚ true ⊚ false

31) It is common for a developer to hold back funds before making final payment to ensure that subcontractors perform all work completely. ⊚ true ⊚ false

32)

It is illegal for the lender to hold back funds from the developer. ⊚ true ⊚ false

33) The loan submission package for a land development project must include project information, market financial data, government and regulatory information, legal documentation, and emergency contingency plans. ⊚ true ⊚ false

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34) While permitted for building projects, holdbacks are not permitted for land development projects. ⊚ true ⊚ false

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Answer Key Test name: chapter 17 1) A 2) A 3) C 4) B 5) C 6) C 7) D 8) D 9) D 10) D 11) A 12) D 13) B 14) A 15) D 16) A 17) B 18) C 19) TRUE 20) FALSE 21) TRUE 22) TRUE 23) TRUE 24) FALSE 25) TRUE 26) FALSE Version 1

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27) FALSE 28) FALSE 29) FALSE 30) TRUE 31) TRUE 32) FALSE 33) FALSE 34) FALSE Student name: 1)

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.

2)

Noncumulative pari passu distribution refers to:

A) the payment of dividends by S-corporations.

B) a payment received by money partners and operating partners in proportion to their capital investment.

C) payments distributed when the enterprise has negative cash flows.

D) the difference in payments received by partners and the payments received by bondholders.

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3) A partnership agreement provides that, at sale, cash proceeds are distributed first to Mr. Smith in an amount equal to his original investment less any cash distributions previously received, then split 50-50 between Mr. Smith and Ms. Jones. Assume that the cash flows from sale are $1 million. How much would Mr. Smith receive if his initial investment was $400,000 and he previously received $25,000 in distributions?

A) $312,500 B) $375,000 C) $487,500 D) $687,500

4)

Which of the following BEST defines the term "real estate syndication?"

A) A group of investors who have combined their financial resources with the expertise of a real estate professional to carry out a real estate project.

B) An organization that acts as a single legal entity and is held separate from the individual investors.

C) An organizational form of real estate ownership in which income and expenses are passed through to individuals.

D) A group of investors who have combined their financial resources to provide debt funding for a real estate project.

5) 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 2 through 4 income allocated from the account equaled a total of $9,000 ($3,000 per year). The allocated 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

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6) 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 2 through 4 income allocated from the account equaled a total of $9,000 ($3,000 per year). The allocated reduction in debt at the end of Year 4 from amortization of the loan is equal to $1,100. What is the balance of Tom's capital account at the end of Year 4?

A) −$9,900 B) $24,000 C) $69,000 D) $70,100

7) In a syndication, when cash is distributed from an investor's partnership basis, how is the new basis calculated?

A) B) C) D)

The cash distribution is added to the investor’s capital gain.

The cash distribution is subtracted from the investor’s capital gain.

The cash distribution is added to the investor’s partnership basis.

The cash distribution is subtracted from the investor’s partnership basis.

8) Which of the following does NOT need to occur for a partnership allocation to have substantial economic effect?

A) An adjustment must be made in the partner’s capital account B) Liquidation proceeds must be distributed in accordance with capital accounts C) Profits and losses must be allocated to different partners in proportion to their equity contribution D) Following the distribution of sale proceeds, partners must be liable to the partnership to restore any deficit in their capital accounts

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9) as:

Sharing cash flow in a joint venture in proportion to the capital contribution is referred to

A) B) C) D)

pari passu. equal sharing. preferred return. equity sharing.

10) When one investor receives cash flow to achieve a certain IRR before splitting the remaining cash flow it is referred to as: A) B) C) D)

IRR lookback.

IRR preference. preferred IRR. adjusted IRR.

11) How should interest prepayments (including points) for income-producing real estate be handled for tax purposes?

A) B) C) D)

They should be expensed over the first year.

They should be amortized over a period of no less than 60 months.

They should be amortized over the life of the loan.

They should be capitalized and deducted once the loan is paid off.

12) A syndicate that raises capital before identifying any or all of the properties it will eventually own is known as a(n): A) B) C) D)

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Safe harbor.

Accredited investor.

Caveat.

Blind pool.

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13) Interest and real estate tax incurred during construction of real property improvements must be: A) B) C) D)

deducted from the resale price of the property. included in the depreciable basis of the property. expensed over the construction period. excluded from the value of improvements.

14) Which of the following imposes certain ownership and minimum capital requirements to avoid "dummy" corporations acting as sole corporate general partners?

A) B) C) D)

Safe harbor rules Caveat rules Blind pool rules Corporate regulations

15) Which of the following is NOT one of the criteria used to determine whether a partnership will be treated as a corporation for tax purposes?

A) B) C) D)

Unlimited liability Continuity of life Centralization of management Free transferability of interests

16) Which form of ownership may be viewed unfavorably for use in real estate investment due to the personal liability associated with this approach?

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A) B) C) D)

General partnership Limited partnership Sole proprietorship C corp

17) Which of the following legal entities will likely be ended once the objectives of the effort have been met?

A) B) C) D)

Limited partnership S corp Limited liability corporation Joint venture

18) An arrangement in which a developer/operator may receive a substantial incentive after initial distributions have been made is referred to as a: A) B) C) D)

bonus. promote. cumulative distribution. consideration.

19) An IRR preference will always give the investor a return that is equal to or better than what the return would be with an IRR lookback. ⊚ true ⊚ false

20) A disadvantage of a limited partnership is that any tax losses can be allocated to the partners to reduce their personal taxable income.

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⊚ ⊚

true false

21) A general partner is personally liable for the debts of the partnership whereas a limited partner has "limited liability" like shareholders in a corporation. ⊚ true ⊚ false

22) C-corporations have the advantage of providing a pass-through of income for tax purposes. ⊚ true ⊚ false

23) Syndications can take the form of corporations, limited partnership, or other organizational forms. ⊚ true ⊚ false

24) When a syndication is offered as a "blind pool" offering, the properties to be purchased are not identified before funds are raised. ⊚ true ⊚ false

25) A limited partnership limits the general partners’ liability to the capital they originally invested. ⊚ true ⊚ false

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26) Capital accounts are debited for cash contributed to the partnership and credited for cash distributed to the partner. ⊚ true ⊚ false

27) According to IRS rules, interest and real estate taxes incurred during construction of real property improvements must be included in the depreciable basis of the property. ⊚ true ⊚ false

28) Deductions for payment to a developer or syndicator for their covenants not to compete with a specific project are never allowed according to IRS rules. ⊚ true ⊚ false

29) Joint ventures typically involve many individual investors joining together to purchase real estate. ⊚ true ⊚ false

30)

Tax losses cannot be allocated to partners in a syndication. ⊚ true ⊚ false

31) If a developer does not have sufficient cash flows to provide an investor-partner with a preferred distribution, the requirement to do so carries over to the following year. ⊚ true ⊚ false

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Answer Key Test name: chapter 18 1) B 2) B 3) D 4) A 5) A 6) B 7) D 8) C 9) A 10) B 11) C 12) D 13) B 14) A 15) A 16) C 17) D 18) B 19) TRUE 20) FALSE 21) TRUE 22) FALSE 23) TRUE 24) TRUE 25) FALSE 26) FALSE Version 1

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27) TRUE 28) FALSE 29) FALSE 30) FALSE 31) TRUE Student name: 1)

Which of the following is NOT a major type of mortgage-related security?

A) B) C) D)

Mortgage-backed bonds (MBBs) Mortgage pass-through security (MPTs) American depositary receipts (ADRs) Collateralized mortgage obligations (CMOs)

2) A rising rate of market interest would have which of the following impacts on a mortgage pass-through security?

A) B) C) discount D)

Increase the market value of the MPT Decrease the market value of the MPT Increase or decrease, depending on whether the MPT was issued at a premium or a The market rate of interest has no impact on the market value of an MPT

3) A falling rate of market interest would have which of the following impacts on a mortgage pass-through security?

A) B) C) D) the MPT"

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Increase prepayments on loans in the pool Decrease prepayments on loans in the pool Decrease the market value of the MPT Both "Increase prepayments on loans in the pool" and "Decrease the market value of

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4) A 25-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, bond market investors require a 12 percent interest rate on the bond. What is the initial price on the bond?

A) $588 B) $5,686 C) $6,863 D) $14,270

5) A 25-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, bond market investors require a 12 percent interest rate on the bond. Assume that 20 years after the bond is issued, bond market investors require a 15 percent interest rate on the bond. What is the market price of the bond after 20 years?

A) $5,686 B) $6,863 C) $7,653 D) $14,270

6) A 10-year maturity mortgage-backed bond is issued. The bond is a zero coupon bond that promises to pay $10,000 (par) after 10 years. At issue, bond market investors require a 15 percent interest rate on the bond. What is the initial price on the bond?

A) $2,252 B) $2,472 C) $8,696 D) $10,000

7) Which of the following developments assure mortgage investors they will receive interest and principal payments at little or no risk?

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A) B) C) D)

The availability of hazard and title insurance.

The availability of mortgage default insurance and loan guarantees.

The development of standardized loan underwriting, processing, and servicing.

All of the choices are correct.

8) The Government National Mortgage Association (GNMA) was organized to perform three principle functions. Which of the following is NOT a function of GNMA? A) Provide special assistance lending in support of federal programs.

B) Manage and liquidate mortgages previously acquired by FNMA. C) Manage all secondary mortgage market operations.

D) Provide a guarantee for FHA/VA mortgage pools that would provide a guarantee for mortgage backed securities.

9)

Which of the following statements regarding mortgage-backed bonds is generally TRUE?

A) The total value of the MBBs issued usually equals the value of the mortgages in the underlying pool.

B) Unlike corporate bonds, MBBs usually are issued with variable coupon rates of interest.

C) Overcollateralization of the mortgage pool assures investors that the income from the mortgage will be sufficient to pay the interest on the bonds and the principal upon maturity.

D) All of the choices are true.

10) 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?

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A) B) C) D)

The amount of overcollateralization of the mortgage pool.

The geographic distribution of the mortgages.

The amount of seasoned mortgages included in the pool.

All of the choices should be considered.

11) When pricing mortgage pass-through securities, issuers use each of the following methods to include prepayment assumptions EXCEPT: A) B) C) D)

12)

FHA prepayment experience. the pool factor technique. the PSA prepayment model. constant rates of prepayment.

Prices of mortgage pass-through securities are: A) unaffected by changes in interest rates.

B) related positively to changes in interest rates.

C) more sensitive to declines in interest rates and less sensitive to increases in interest

rates.

D) less sensitive to declines in interest rates and more sensitive to increases in interest rates.

13) Compared to mortgage pass-though securities (MPTs), MBBs should be priced to provide: A) B) C) D)

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lower yields, because the MBB issuer bears lower prepayment risk. higher yields, because the MBB issuer bears higher prepayment risks. the same yields, because of equivalent amounts of prepayment risk.

None of the choices are correct.

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14) If a mortgage pool consists of five 10 percent FRMs totaling $500,000, five 9 percent FRMs totaling $450,000, and ten 8 percent FRMs totaling $750,000, what is the weighted average coupon rate?

A) 8.75% B) 8.85% C) 9.00% D) None of the choices are correct.

15) The pass-through rate is the coupon rate of interest promised by the issuer of a passthrough security to the investor. In most instances, the pass-through rate is: A) equal to the average rate of interest on all mortgages in the underlying pool.

B) lower than the lowest rate of interest on any mortgage in the underlying mortgage pool.

C) higher than the highest rate of interest on any mortgage in the underlying mortgage pool.

D) not described by any of the choices.

16)

All other conditions being the same, the more seasoned a mortgage is: A) B) C) D)

17)

the greater the likelihood of prepayment. the greater the likelihood of default. the greater the likelihood that the mortgage will be carried to maturity.

All of the choices are correct.

Which of the following is NOT a guarantee of Ginnie Mae (GNMA)?

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A) B) C) D)

18)

The primary purpose of Freddie Mac (FHLMC) is to: A) B) C) D)

19)

Timely payments of principal and interest Settling accounts with servicer Payment of all mortgages at maturity Repayment of outstanding loan balances upon default

provide a secondary market for mortgage originators. provide investors with a guaranteed rate of return. create competition for Fannie Mae and Ginnie Mae. provide consumers with more options when deciding on a mortgage loan.

Which of the following is FALSE regarding mortgage-backed bonds (MBBs)?

A) B) C) D)

Their issuer retains ownership of mortgages Their maturity is indefinite at issuance They are issued with fixed coupon rates They are usually underwritten by investment banking companies

20) The investment rating for mortgage-backed bonds depends on each of the following EXCEPT: A) B) C) D)

21)

appraised value and DCR. interest rates in mortgage pool. extent of over collateralization. initial price paid for the security.

Which of the following is NOT a risk for mortgage-backed securities?

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A) B) C) D)

Default risk Delayed payment risk Pass-through risk Interest rate risk

22) The practice that is implemented with MBBs to compensate for the likelihood that some borrowers will default or make delayed payments on mortgage loans that make up the pool is: A) B) C) D)

default compensation. tardy payment compensation. prompt payment actions. overcollateralization.

23) The process that a trustee would use in assessing whether the value of a mortgage pool is within the required overcollateralization levels is referred to as: A) B) C) D)

24)

the overcollateralization process. marking to market.

MBB appraisal. market value assessment.

In 2008, Fannie Mae was spun off in an initial public offering as a private company. ⊚ true ⊚ false

25) The secondary mortgage market enables mortgage banking companies to sell existing mortgages and thereby replenish funds with which new loans can be originated. ⊚ true ⊚ false

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26) One difference between mortgage securities and corporate bonds is that mortgage securities tend to be "overcollateralized." ⊚ true ⊚ false

27) An optional delivery commitment gives Fannie Mae the right (but not the obligation) to purchase mortgage loans from originators. ⊚ true ⊚ false

28) Under the HUD Act of 1968, assets, liabilities, and management of secondary market operations were transferred to a completely private corporation known as "Ginnie Mae" (GNMA). ⊚ true ⊚ false

29) The Federal Home Loan Mortgage Corporation’s primary purpose is to provide liquidity for conventional mortgage originators just as FNMA and GNMA did for originators of FHA-VA mortgages. ⊚ true ⊚ false

30) When issuing mortgage-backed bonds, the issuer transfers ownership of the underlying mortgage to the investors/bondholders. ⊚ true ⊚ false

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31) When market interest rates exceed the coupon rate of an MBB, the price of the bond will be greater than its par value. ⊚ true ⊚ false

32) Marking the mortgage to market is the process of accumulating mortgage pools and marketing them to individual investors as mortgage-backed bonds. ⊚ true ⊚ false

33) A mortgage pass-through security represents an undivided ownership interest in a pool of mortgages held by a trustee. ⊚ true ⊚ false

34) When a pass-through security investor makes repetitive requests of a mortgagor, it is referred to as a nuisance call. ⊚ true ⊚ false

35) Generally, prices for zero coupon mortgage-backed bonds are more sensitive to interest rate changes than interest bearing MBBs. ⊚ true ⊚ false

36) The standard PSA prepayment curve assumes prepayments of 0.2 percent per month for the first 12 months, and then increases by 0.2 percent per month until month 30. ⊚ true ⊚ false

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37) Issuers typically pledge 105 percent to 120 percent in mortgage collateral in excess of par value of the securities issued, in order to overcollateralize MBBs. ⊚ true ⊚ false

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Answer Key Test name: chapter 19 1) C 2) B 3) A 4) C 5) C 6) B 7) D 8) C 9) C 10) D 11) B 12) D 13) B 14) B 15) B 16) A 17) C 18) A 19) B 20) D 21) C 22) D 23) B 24) FALSE 25) TRUE 26) TRUE Version 1

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27) FALSE 28) FALSE 29) TRUE 30) FALSE 31) FALSE 32) FALSE 33) TRUE 34) FALSE 35) TRUE 36) TRUE 37) FALSE Student name: 1) What is the primary distinction between mortgage-related securities backed by residential mortgages and those backed by commercial mortgages?

A) Default is the key risk with residential mortgages; prepayment is the key risk with commercial mortgages.

B) Interest rate risk is the key risk with residential mortgages; prepayment is the key risk with commercial mortgages.

C) Prepayment is the key risk with residential mortgages; default is the key risk with commercial mortgages.

D) Prepayment is the key risk with residential mortgages; interest rate risk is the key risk with commercial mortgages.

2) A mortgage company is issuing a CMO with three tranches, with the principal and coupon rate given in the table below. When issued, the weighted average coupon on the CMO will be which of the following?

Tranche A B Z

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Principal $ 40,000,000 30,000,000 30,000,000

Coupon Rate 9.25% 10.00% 11.00%

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A) 9.25% B) 10.00% C) 10.08% D) 11.00%

3)

Which of the following statements regarding subprime mortgages is TRUE?

A) Subprime mortgages are not Ginnie Mae guaranteed, so CMO investors are exposed to default risk.

B) Subprime mortgages are not Ginnie Mae guaranteed, so securities backed by subprime mortgages cannot be issued.

C) CMOs backed by subprime mortgages cannot be used as collateral for CDOs. D) Due to diversification, securities backed by subprime loans are of no more risk than those backed by prime loans.

4)

The main purpose of the Term Asset-Backed Securities Loan Facility (TALF) is to: A) buy mortgage-backed securities owned by Freddie Mac, Fannie Mae, and Ginnie

Mae. B) Issue CDOs and use the proceeds to fund infrastructure projects to stimulate the economy.

C) Regulate hedge funds to reduce investments in risky assets.

D) Use residential loans as collateral to purchase U.S. Treasuries as a way to reduce interest rates.

5) Which of the following statements regarding mortgage pass-through bonds (MPTBs) is FALSE?

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A) MPTBs can be viewed as mortgage-backed bonds with the pass-through of principal and prepayment features of a mortgage pass-through security.

B) Most MPTBs are based on residential mortgage pools and are generally overcollateralized.

C) MPTBs represent an undivided equity ownership interest in a mortgage pool.

D) All of the choices are correct.

6)

The credit rating of an MPTB depends largely on: A) B) C) D)

7) that:

In comparison to other mortgage-backed securities, the unique characteristic of CMOs is

A) B) C) D) investors.

8)

the amount of overcollateralization. the degree to which government-related securities constitute the excess collateral. the riskiness of the mortgage in the underlying pools.

All of the choices are correct.

CMO issuers do not retain ownership of the underlying mortgage pool.

CMOs are issued in multiple security classes. the CMO mortgage pool is not overcollateralized.

CMOs are a pay-through in which all amortization and prepayments flow through to

Which of the following is NOT a CMO security type?

A) B) C) D)

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A repeat floater A Z tranche An inverse floater An IO tranche

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9)

For which of the following investments is the exact date of maturity known?

A) B) C) D)

10)

For which of the following investments does the issuer bear all of the prepayment risk?

A) B) C) D)

11)

CMOs MBBs MPTs MPTBs

Which of the following investments in NOT a debt obligation of the issuer?

A) B) C) D)

12)

CMOs MBBs MPTs MPTBs

CMOs MBBs MPTs MPTBs

Which of the following is NOT characteristic of commercial-backed mortgage securities?

A) The underlying mortgage pool represents a variety of different property types (retail, multifamily, etc.) and a specific geographical area.

B) The underlying mortgages have usually been outstanding for several years.

C) One of the primary issuers of such securities are insurance companies.

D) In general, the underlying mortgage pool for such securities contain fewer mortgages than are included in residential-backed mortgage pools.

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13)

REMICs were created in order to avoid taxes: A) B) C) D)

14)

entirely. at the investor level. at the entity level. but no taxes can be avoided.

Duration is defined as which of the following?

A) A measure of the extent to which different investments expose an investor to interest rate risk.

B) A measure of the weighted-average time required before all principal and interest is received on an investment.

C) A measure that takes into account both the size of cash flows and the timing of their receipt.

D) All of the choices are correct.

15)

The residual position in the CMO offering is considered which kind of position?

A) B) C) D)

Primary Equity Interest Debt

16) A calamity call, which allows the issuer to recall all securities for a specified time, can be used in each of the following situations EXCEPT when:

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A) B) C) D)

investors want to cash out their positions. interest rates decline sharply. prepayments decline sharply. reinvestment rates are below what was promised to investors.

17) The total interest collected from the pool will be if prepayment accelerates; therefore, the dollar spread between interest inflow and outflow becomes .

A) B) C) D)

18)

Which of the following is FALSE regarding a planned amortization class (PAC) tranche?

A) B) C) D)

19)

It has the greatest degree of cash flow certainty.

Variable payments are received.

Payments are received over predetermined period of time.

Payments are received under a range of prepayment scenarios.

Convexity is a gauge for which of the following?

A) B) C) D)

20)

lower; smaller lower; wider higher; smaller higher; wider

Profitability Return Sensitivity Duration

Which of the following does NOT increase the noncredit risks of CDOs?

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A) B) C) D)

Collateral management risk Certainty in average life of CDO tranches Higher correlation and liquidity All of the choices increase the noncredit risks of CDOs.

21) Which of these items are hybrid securities that contain elements of mortgage-backed bonds and mortgage pass-throughs?

A) B) C) D)

MPTBs CDOs CMOs Tranches

22) Class A investors are sometimes repaid with an accelerated pattern of cash flows and are sometimes referred to as: A) B) C) D)

accelerated tranches. quick pay tranches. tranche residuals. fast pay tranches.

23) A tranche that has a coupon interest rate that adjusts in the opposite direction to its index is referred to as a(n): A) B) C) D)

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reverse floater tranche. inverse floater tranche. upside-down floater tranche. backwards floater tranche.

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24) One way that a mortgage pay-through bond (MPTB) is like a mortgage-backed bond (MBB) is that the pay-through bond is a debt obligation of the issuer. ⊚ true ⊚ false

25) The CMO is considered a marketing innovation as well as a financial innovation, because it is the first security in the secondary mortgage market to have run a prime-time television ad. ⊚ true ⊚ false

26)

A derivative security derives its value from another security, index, or financial claim. ⊚ true ⊚ false

27)

Investors retain prepayment risk on MBBs, but issuers incur this risk with MPTBs. ⊚ true ⊚ false

28)

A floater is a CMO tranche that has a variable interest rate. ⊚ true ⊚ false

29) The issuer of a mortgage pass-through bond bears all the prepayment risk of the underlying mortgages. ⊚ true ⊚ false

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30) The CMO investor assumes the prepayment risk of the underlying mortgages, although the CMO modifies how the risk is allocated. ⊚ true ⊚ false

31) In comparison to mortgage pass-through securities, CMOs attract a broader class of investors because, by prioritizing cash flows, they can offer more specific maturities. ⊚ true ⊚ false

32)

A CMO does not completely eliminate prepayment risk. ⊚ true ⊚ false

33) If a premium is paid on a CMO issue (at the time of issue), yields will increase as prepayment rates accelerate. ⊚ true ⊚ false

34) From the issuer’s perspective, the use of MBBs and MPTBs should be viewed as a method of debt financing. ⊚ true ⊚ false

35) Cash flows remaining after all CMO tranches have been paid off are referred to as REMICs. ⊚ true ⊚ false

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36)

CMO investors only pay taxes on interest income. ⊚ true ⊚ false

37) In CMO terminology, planned amortization classes (PACs) are also known as companion tranches. ⊚ true ⊚ false

38)

CDOs often include "B" notes, mezzanine debt, and preferred equity as investments. ⊚ true ⊚ false

39) CDO managers raise capital through the issuance of rated CDO debt and equity to purchase an undiversified pool of credit instruments. ⊚ true ⊚ false

40) In CDOs both equity and debt holders prefer riskier, higher-yielding collateral to collect excess spreads. ⊚ true ⊚ false

41) Subprime mortgage-backed securities generally include FHA-insured or VA-guaranteed mortgages, along with conventional mortgages. ⊚ true ⊚ false Version 1

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Answer Key Test name: chapter 20 1) C 2) B 3) A 4) A 5) C 6) D 7) B 8) A 9) B 10) B 11) C 12) A 13) C 14) D 15) B 16) A 17) A 18) B 19) C 20) B 21) A 22) D 23) B 24) TRUE 25) FALSE 26) TRUE Version 1

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27) FALSE 28) TRUE 29) FALSE 30) TRUE 31) TRUE 32) TRUE 33) FALSE 34) TRUE 35) FALSE 36) TRUE 37) FALSE 38) TRUE 39) FALSE 40) FALSE 41) FALSE Student name: 1) Net Revenue Less: Operating expenses Depreciation and amortization Income from operations Less: Interest expense Net income

$ 20,000,000

9,800,000 4,400,000 5,800,000

$ 1,280,000 $ 4,520,000

Consider the financial statements for a REIT, given above. Price multiples for comparable REITs are about 10 times current funds from operation (FFO). What price does this suggest for the REIT’s shares if 1,000,000 shares are issued?

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A) B) C) D)

2)

The most common type of REITs in today’s market are: A) B) C) D)

3)

$4.52 per share $45.20 per share $8.92 per share $89.20 per share

equity trusts. mortgage trusts. hybrid trusts. partnership trusts.

Which of the following regarding private (unlisted) REITs is TRUE?

A) Unlisted REITs are less expensive than listed REITs. B) Unlisted REITs are less liquid than listed REITS. C) Unlisted REITs are more subject to short-term market price volatility than listed REITS. D) "List or liquidate" provisions in unlisted REITs make such REITs less risky than listed REITS.

4) A REIT has an NOI of $15 per share and currently pays a dividend of $10 per share. The dividend is projected to increase by 4 percent by next year and continue to increase by 4 percent per year thereafter. Assuming that the blended cap rate is 9.75 percent and the required rate of return is 10.5 percent, what value would the Gordon dividend discount model provide?

A) $60.15 B) $71.89 C) $153.85 D) $160.00

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5) A REIT has an NOI of $15 per share and currently pays a dividend of $10 per share. The dividend is projected to increase by 4 percent by next year and continue to increase by 4 percent per year thereafter. Assuming that the blended cap rate is 9.75 percent and the required rate of return is 10.5 percent, what would be the net asset value (NAV) of the REIT? A) $60.15 B) $71.89 C) $153.85 D) $160.00

6)

Which of the following is NOT a current type of REIT? A) B) C) D)

Mortgage trust Equity trust Hybrid trust Neither mortgage trust nor hybrid trust are REITs.

7) Hybrid REITs, which are no longer tracked by NAREIT, are comprised of what primary classifications of REITs? A) B) C) D)

UPREITs, mortgage Mortgage, equity, retail Mortgage, equity Healthcare, retail, office

8) A REIT with 100 shares outstanding earns $1,000 in rent and incurs operating expenses of $400. In addition, the REIT owns property with an historic cost of $6,000 and depreciates it over a 15-year period using straight-line depreciation. What are the funds from operations per share and the earnings per share for this REIT?

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A) B) C) D)

$4 and $3, respectively $4 and $2, respectively $6 and $2, respectively $6 and $3, respectively

9) A REIT with 100 shares outstanding earns $1,000 in rent and incurs operating expenses of $400. In addition, the REIT owns property with an historic cost of $6,000 and depreciates it over a 15-year period using straight-line depreciation. At the very least, what dividend payment must it make to maintain its tax exempt status?

A) B) C) D)

$1.80/share $2.00/share $3.60/share $5.40/share

10) An investor pays $63.00 per share for stock in a given REIT. The REIT declares a dividend of $4.00 per share and has an EPS of $2.37. Considering the recovery of capital (ROC), what is the new cost basis of the stock acquired by the investor?

A) $60.63 B) $61.37 C) $63.00 D) $64.63

11)

Which of the following is NOT a requirement of REITs?

A) A REIT must have at least 100 stockholders.

B) Not more than 50 percent of a REIT's shares can be owned by five or fewer shareholders.

C) At least 90 percent of a REIT's income must be distributed to shareholders.

D) All of the choices are REIT requirements.

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12) Which of the following REIT types is organized to acquire the specific property or properties described in its prospectus?

A) B) C) D)

13)

Which of the following REIT types is NOT likely to own real property?

A) B) C) D)

14)

A property trust A mixed trust A purchasing trust An exchange trust

Hybrid REIT Mortgage REIT Equity REIT All of the choices are likely to own real property.

Which of the following is likely to occur upon the sale of a REIT-owned property?

A) If a capital gain is realized, the REIT can retain the gain for future investment and be taxed at the appropriate corporate capital gains tax rate.

B) If a capital gain is realized, the REIT can retain the gain for future investment and be taxed at the shareholder's capital gains tax rate.

C) If a capital gain is realized, the REIT can distribute the gain as a dividend to shareholders who will realize it as dividend income for individual tax reporting purposes.

D) If a capital loss is realized, the loss can be passed through to individual investors.

15)

The funds from operations (FFO) for a REIT is roughly equal to:

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A) B) C) D)

NOI less interest deductions. earnings before tax plus noncash expenses.

NOI plus interest deductions. earnings per share plus capital gains.

16) Once an entity has been terminated as a REIT, the entity cannot make a new election to be taxed as a REIT until years after the termination.

A) B) C) D)

17)

2 3 4 5

The difference between EPS (earnings per share) and FFO (funds from operations) is: A) B) C) D)

irrelevant. determined by growth of the company. due to depreciation and amortization. due to the number of shares outstanding.

18) REIT dividends are considered income to offset passive losses.

A) B) C) D)

19)

income and thus do not qualify as passive

portfolio operating trading outside professional

Recovery of capital (ROC) results in a(n):

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A) B) C) D)

increase in the dividend available to the investor. increase in the value of the stock. reduction in the cost basis of acquired stock. reduction in losses on the stock.

20) The growth of the REIT industry in the early 1970s was mainly attributed to which of the following?

A) B) C) D)

Mortgage trust loans were less regulated than bank loans Increased interest rates Declined performance of other investments Increased value of real property throughout the country

21) Which of the following represents the space that is currently being rented to paying tenants?

A) B) C) D)

Leased space Occupied space Ground space REIT space

22) An arrangement in which a REIT collects a stream of rents from a building owner, then makes a lower, and sometimes fixed, payment to the landowner is a: A) B) C) D)

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fixed investment.

REIT spreading. spread investing. renewal option.

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23) At least 95 percent of the value of a REIT’s assets must consist of real estate assets, cash, and government securities. ⊚ true ⊚ false

24) Funds from operation (FFO), is calculated by adding back depreciation, amortization, and other noncash deductions to earnings. ⊚ true ⊚ false

25) A mortgage REIT is a REIT that primarily invests in mortgages rather than equity ownership. ⊚ true ⊚ false

26)

The United States is the only country that allows REITs (or similar investments). ⊚ true ⊚ false

27)

Mortgage REITs use debt financing to increase their capital bases. ⊚ true ⊚ false

28) REITs are required to pay out 90 percent of their earnings as dividends or they will face penalties. ⊚ true ⊚ false

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29) The difference between EPS (earnings per share) and FFO (funds from operations) is the interest deduction. ⊚ true ⊚ false

30)

Usually ground leases are for relatively short periods of time. ⊚ true ⊚ false

31)

REITs can sometimes capitalize rather than lease certain expenditures to increase FFO. ⊚ true ⊚ false

32)

Because REITs are corporations, they are subject to double taxation. ⊚ true ⊚ false

33)

A REIT must have at least 200 shareholders. ⊚ true ⊚ false

34)

A portion of a REITs dividend may be a nontaxable return of capital. ⊚ true ⊚ false

35) Real estate assets, cash, and government securities must represent at least 75 percent of REIT assets.

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⊚ ⊚

36)

true false

REITs must be passive investments with external advisors. ⊚ true ⊚ false

37) A blended capitalization rate is an average of the capitalization rates that would be used for the individual properties in a portfolio if each was being valued separately. ⊚ true ⊚ false

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Answer Key Test name: chapter 21 1) D 2) A 3) B 4) D 5) C 6) C 7) C 8) C 9) A 10) B 11) D 12) C 13) B 14) A 15) B 16) D 17) C 18) A 19) C 20) A 21) B 22) C 23) FALSE 24) TRUE 25) TRUE 26) FALSE Version 1

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27) TRUE 28) TRUE 29) FALSE 30) FALSE 31) TRUE 32) FALSE 33) FALSE 34) TRUE 35) TRUE 36) FALSE 37) TRUE Student name: 1) Consider an investment held over three years with a return of +20 percent in the first year, −25 percent in the second year, and +20 percent in the third year. What is the arithmetic mean return on the investment?

A) −2.6% B) +2.6% C) +5.0% D) +8.0%

2) Consider an investment held over three years with a return of +20 percent in the first year, −25 percent in the second year, and +20 percent in the third year. What is the geometric mean return on the investment?

A) −2.6% B) +2.6% C) +5.0% D) +8.0%

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3) What statistical concept do many portfolio managers use to represent risk when considering investment performance?

A) The standard deviation of returns B) The difference, or "spread," between the highest value over the holding period and the lowest value over the holding period C) The geometric mean return D) The coefficient of variation

4) Why does including REITs in a portfolio containing S&P 500 securities produce diversification benefits?

A) B) C) D)

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Real estate investment returns are highly correlated with returns for stocks.

Real estate investment returns are not highly correlated with returns for stocks.

Real estate investment returns are not subject to federal income taxes.

Real estate investment returns do not change much from year to year.

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5)

Assume you have a choice between investing in either an equity REIT, Microsoft stock (MSFT), or a combination of the two. Which point in the figure above is NOT on the efficient portfolio frontier?

A) B) C) D)

6)

A B C All points are on the efficient portfolio frontier.

The data sources used to produce investment returns on investment properties include:

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A) B) C) D)

7)

the National Association of Real Estate Professionals (NAREP). the National Association of Real Estate Investment Trusts (NAREIT). the National Board of Realtors (NBR). all of the above.

The NCREIF Property Index can be characterized by each but which of the following?

A) B) NCREIF. C) D)

Quarterly rates of return are calculated for all properties included in the index.

The information used in compiling the index is contributed by members of the The index reflects payments to both property managers and portfolio asset managers.

All of the above are true.

8) On January 1st, an investor purchases Security A for $105. Over the next four months, dividends totaling $15 were paid on Security A. On March 31st, Security A was sold for $120.

What is the holding period return for Security A? A) 0.0% B) 14.3% C) 25.0% D) 28.6%

9)

Geometric mean returns are:

A) simple averages of holding period returns.

B) expressed as compound rates of interest.

C) more applicable when no specific time interval is considered to be any more important than another.

D) widely used in statistical studies spanning very long periods of time.

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10) Regarding real estate investments, risk that is associated with the type of property and its location, design, lease structure, and so on can be thought of as: A) B) C) D)

11)

marketability risk. liquidity risk. unsystematic risk.

Interest rate risk.

The coefficient of variation, also known as the risk-to-reward ratio, is defined as: A) B) C) D)

the standard deviation of returns divided by the mean return. the variance of return multiplied by the mean return. the variance of returns divided by the standard deviation of returns. none of the above.

12) Which of the following provides a measure of the extent to which returns tend to move together or have no relationships?

A) B) C) D)

The coefficient of determination The variance The coefficient of variation The coefficient of correlation

13) If the returns of two securities are compared over time and there appears to be no relationship between their movements, what is the likely value of their coefficient of correlation?

A) +1 B) −1 C) 0 D) +∞ (infinity)

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14) Assume a portfolio is comprised of two securities, A and B, whose standard deviations are 0.0412 and 0.0721, respectively. If their covariance is 0.002, what is their coefficient of correlation?

A) 0.005 B) 0.115 C) 0.673 D) 1.485

15) The optimal combination of securities that provides the greatest amount of return for each level of risk is known as: A) B) C) D)

the expected frontier. the economic frontier. the efficient frontier. none of the above.

16) The unit of measure that is used by portfolio managers to measure returns for individual securities on a periodic basis is the: A) B) C) D)

17)

return on investment (ROI). holding period return (HPR). geometric mean return. arithmetic mean return.

The variability on an asset’s returns represents:

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A) B) C) D)

18)

flexibility. profitability. risk. default.

One would see the greatest amount of diversification from two securities that are: A) B) C) D)

positively correlated. negatively correlated. not correlated. perfectly correlated.

19) Which of the following is a major property category associated with the NCREIF Property Index?

A) B) C) D)

Apartment complexes Office buildings Hotels All of the above are associated with the NCREIF Property Index.

20) It is more difficult to compare the investment performance of real estate versus stocks and bonds. ⊚ ⊚

true false

21) The NCREIF Property Index measures the investment performance of real estate by using actual sale prices. ⊚ true ⊚ false Version 1

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22) Much like the securities markets, there is a large, centralized collection of real estate transactions and operating income data. ⊚ true ⊚ false

23) The NCREIF Property Index includes property value increases or decreases only when properties are sold since the sale price is the only true measure of market value. ⊚ true ⊚ false

24)

Both levered and unlevered properties are included in the NCREIF Property Index. ⊚ true ⊚ false

25) An investor in a mortgage REIT is basically buying equity shares of an entity whose assets are mainly mortgages. ⊚ true ⊚ false

26) When used to evaluate the performance of an investment, the geometric mean is considered to be superior to the arithmetic mean. ⊚ true ⊚ false

27) When comparing investment alternatives, the standard deviation is deemed to be a measure of risk.

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⊚ ⊚

true false

28) The optimal portfolio is obtained by combining a group of securities which, by themselves, offer the highest returns with the lowest risk. ⊚ true ⊚ false

29) As long as the coefficient of correlation between two stocks is less than +1, some reduction in risk can be obtained by combining the securities. ⊚ true ⊚ false

30) If two securities have the same positive mean returns and they are perfectly negatively correlated, an investor in such securities will earn a positive return with zero risk. ⊚ true ⊚ false

31) In comparison to investment portfolios comprised entirely of corporate stocks and bonds, portfolios which include some form of real estate investment tend to offer higher returns for the same level of risk. ⊚ true ⊚ false

32) The sources of data for real estate performance evaluation are security prices for REIT shares and the value of individual properties that are owned by pension plan sponsors. ⊚ true ⊚ false

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33) The holding period return and geometric mean return calculations will yield the same result for holding periods longer than two years. ⊚ true ⊚ false

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Answer Key Test name: chapter 22 1) C 2) B 3) A 4) B 5) A 6) B 7) C 8) D 9) B 10) C 11) A 12) D 13) C 14) C 15) C 16) B 17) C 18) B 19) D 20) TRUE 21) FALSE 22) FALSE 23) FALSE 24) TRUE 25) TRUE 26) TRUE Version 1

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27) TRUE 28) FALSE 29) TRUE 30) TRUE 31) TRUE 32) TRUE 33) FALSE Student name: 1) Large, private funds are typically created by real estate investment managers who develop an investment strategy involving which of the following?

(1) The types of properties to be acquired and markets where acquisitions will be made (2) How the fund will be operated (3) When properties are to be sold (4) How the fund strategy will align with the real estate investment requirements of investors A) 1, 2, 3 B) 1, 2, 4 C) 2, 3, 4 D) All of the above

2) Which of the following documents is used to inform real estate fund investors of the discretion that managers may exercise related to the acquisition, management, and sale of properties in the fund?

A) B) C) D)

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Fund agreement Prospectus Due diligence record Deed of trust

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3) Which of the following is NOT one of the typical categories of real estate investment funds?

A) B) C) D)

Core funds Value-add funds Growth funds Opportunity funds

4) funds take on risks by conducting ground up development projects that expose the funds to additional construction risks, such as entitlements, construction delays, cost overruns, complex JV management issues, and so on, and use a relatively high degree of financial leverage.

A) B) C) D)

Core Opportunity Value-add Core plus

5) A fund structure is commonly used by managers of very large, open-end funds that are expected to hold a substantial number of properties in various locations.

A) B) C) D)

commingled separate conjoined adjacent

6) Which type of fund structure would investment managers be likely to use in order to raise a specific amount of capital over a specific period of time?

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A) B) C) D)

Open-end fund Closed-end fund Finite fund Liquidation fund

7) A core strategy typically uses the type of fund structure under which new investors may be admitted after the initial offering and after the commencement of fund operations. These funds are referred to as: A) B) C) D)

closed-end funds. finite funds. liquidation funds. open-end funds.

8) Investors may be concerned if a fund manager deviates from the stated investment strategy by purchasing properties that do not fall within the parameters of the stated objectives of the firm. This practice is referred to as: A) B) C) D)

overage. plan deviation. style drift. eccentricity.

9) Fund managers generally include a conditions under which investors may exit the fund.

A) B) C) D)

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policy in the fund documents specifying

recovery recuperative reclamation redemption

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10) During the period before a fund manager begins to physically purchase properties, investors are typically asked to make capital .

A) B) C) D)

calls commitments contributions assurances

11) Which of the following is NOT a type of fee commonly charged by a real estate investment fund manager?

A) B) C) D)

Acquisition fees Disposition fees Commitment fees Performance fees

12) Given the following fee structure, what is the total amount of fees that would be paid to a fund manager if the actual NOI was $45 million annually?

5.5 percent up to $20 million in annual NOI 5.0 percent for the next $15 million in annual NOI 4.5 percent for the next $10 million in annual NOI 4.0 percent for all over $45 million in annual NOI A) B) C) D)

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$2.3 million $1.1 million $2.0 million $1.8 million

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13) If a fund manager has the opportunity to receive a fee as an added incentive to enhance the performance of the fund, the amount of the fee may be based on the extent to which the performance of the fund exceeds an agreed upon hurdle rate of return. Such a fee is referred to as a: A) B) C) D)

bonus. hurdle fee. fiduciary fee. promote.

14) Fund flows that occur within a quarterly reporting period are referred to as cash flows.

A) B) C) D)

inter-period intra-period regular irregular

15) When comparing investment returns at the fund level against those at the property level, the difference between them is referred to as .

A) B) C) D)

fund drag performance lag leverage drag cash drag

16) is the rate that causes the present value of all cash flows from a property (including its resale value) to be equal to the original purchase price of the property.

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A) B) C) D)

IRR NPV TWR TVM

17) A property was acquired for $950,000 and then produced cash flows of $100,000, $120,000, $135,000, $135,000, and $125,000 at the end of Years 1 through 5, respectively. The property was then sold for $1,200,000 at the end of the fifth year. What was the internal rate of return for this investment?

A) 16.0% B) 16.5% C) 15.5% D) 12.8%

18) For real estate investment funds in which the manager has little control over the flow ofcash into and out of the fund, the preferred performance measure is .

A) B) C) D)

19)

NPV IRR TVM TWR

Which of the following is NOT a measure of risk related to real estate investment funds?

A) B) C) D)

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Tracking error Beta TWR Jensen’s alpha

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20) 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 percent and an expected return of 11.2 percent for the market?

A) 18.6% B) 11.2% C) 15.9% D) 2.7%

21) Well-known market indexes that are adjusted by a margin serve as which of the following in relation to the expected returns of a fund?

A) B) C) D)

Target return Opportunity Benchmark TWR

22) funds mostly invest in existing operating properties that are stable, with low vacancy and current cash flows and are located in major metropolitan areas.

A) B) C) D)

Core Core plus Value-add Opportunistic

23) An office complex was acquired for $1,500,000 in 2017. Cash flows to the investor were received at the end of each year, as follows: 2017 - $250,000; 2018 - $400,000; 2019 - $600,000; 2020 - $600,000. The property was sold for $1,850,000 at the end of 2020. Calculate the IRR for this property.

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A) 7.8% B) 27.7% C) 31.6% D) 34.3%

24) Investments that are held "in trust" on behalf of a pension plan’s beneficiaries cause the fiduciary duties and responsibilities of pension plan sponsors to "carry over" to managers of these real estate investment funds. ⊚ true ⊚ false

25) In a well-diversified investment portfolio, the allocation of real estate investments should not exceed five percent. ⊚ true ⊚ false

26) Opportunity funds are designed for long-term investment and, accordingly, will generally maintain ownership of acquired properties for several years. ⊚ true ⊚ false

27) A new real estate investment fund might feature a "lock-up period" that would prohibit investors from exiting the fund during the fund’s first year or two in operation. ⊚ true ⊚ false

28) The investment strategy of a fund may exclude certain markets, submarkets, and/or property categories from the fund manager’s investment options.

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⊚ ⊚

true false

29) Compared to stock and bond funds, real estate investment funds are typically much easier to value due to the availability of real estate appraisals. ⊚ true ⊚ false

30) In reporting on a fund’s investment performance, managers are generally permitted to provide investors with internally performed appraisals at specific time intervals. Third-party, external appraisals are required only when a property is sold. ⊚ true ⊚ false

31) When reporting on a real estate investment fund, a manager may treat the financial information as an estimate of performance based on the assumption that all of the underlying properties could be sold at their appraised value. ⊚ true ⊚ false

32) Unrealized returns are important to investors in assessing the performance of their investments and of their fund manager(s). ⊚ true ⊚ false

33) Investors may use attribution analysis to examine why the performance of an actively managed real estate investment fund has exceeded its benchmark return. ⊚ true ⊚ false

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34) Value-add funds take on less risk than core funds by purchasing only properties with very low vacancies and stable tenants. ⊚ true ⊚ false

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Answer Key Test name: chapter 23 1) D 2) A 3) C 4) B 5) A 6) B 7) D 8) C 9) D 10) B 11) C 12) A 13) D 14) B 15) D 16) A 17) B 18) D 19) C 20) A 21) C 22) A 23) C 24) TRUE 25) FALSE 26) FALSE Version 1

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27) TRUE 28) TRUE 29) FALSE 30) FALSE 31) TRUE 32) TRUE 33) TRUE 34) FALSE

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