Test Bank For Real Estate Principles A Value Approach 6th Edition By David Ling and Wayne Archer Cha

Test Bank For Real Estate Principles A Value Approach 6th Edition By David Ling and Wayne Archer Chapter1-23 Answers are at the End of Each Chapter Chapter 1

Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) When viewed as a tangible asset, real estate can be defined as the land and its permanent improvements. Improvements on the land include: A) fences.

B) walkways.

C) sewer systems.

D) streets.

2)

All of the following are examples of an improvement on the land EXCEPT: A) fences.

B) building.

C) walls.

D) streets.

3) Real estate is defined as land and its permanent improvements. Which of the following is an example of an improvement to the land?

A) fence B) building C) sewer system D) personal property

4) Real estate consists of the physical structures and infrastructure that accompany the land.

All of the following are examples of an improvement to the land EXCEPT:

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A) walkways.

B) building.

C) sewer system.

D) streets.

5) Real estate is property, which can be either a tangible or an intangible asset. Which of the following would be considered an intangible asset?

A) land B) building C) mortgage D) fence

6)

Which of the following would be considered a tangible asset?

A) land B) lease agreement C) mortgage D) listed REIT

7) If we desire to classify land by its use, land that does not include any improvements to the land would be categorized as: A) “raw” land.

B) building site.

C) developed land.

D) property infrastructure.

8) If we desire to classify land by its use, land that consists of residential, industrial, commercial, and institutional land uses would be classified as:

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A) rural land.

B) federal land.

C) developed land.

D) undeveloped land.

9) According to the Department of Agriculture, which of the following land types constitutes the lowest percentage of land use in the United States?

A) crop land B) federal land and water areas C) forest land D) developed land

10)

The size of a single family residential lot is typically: A) less than one acre.

B) between one and two acres.

C) between two and three acres.

D) greater than three acres.

11)

As of 2018, the single largest asset category in the net worth portfolios of households is: A) government and corporate bonds.

B) stocks and mutual fund shares.

C) deposit and money market funds.

D) housing.

12) Real estate values derive from the interaction of three different sectors in the economy.

Which of the following sectors serves to allocate financial resources among households and firms requiring funds?

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A) user market B) capital market C) government D) property market

13) The demand for real estate derives from the need that market participants (e.g., owner occupants, tenants, renters) have for shelter and convenient access to other locations. This competition for physical location and space occurs in the: A) user market.

B) capital market.

C) government sector.

D) property market.

14) Based on your understanding of the supply and demand dynamics of user/space markets, an increase in demand for leasable space would, all else equal, cause which of the following effects?

A) decrease equilibrium rental rates and decrease property value B) decrease equilibrium rental rates and increase property value C) increase equilibrium rental rates and decrease property value D) increase equilibrium rental rates and increase property value

15) Based on your understanding of the supply and demand dynamics of user/space markets, the new construction of units would, all else equal, cause which of the following effects?

A) decrease equilibrium rental rates and decrease property value B) decrease equilibrium rental rates and increase property value C) increase equilibrium rental rates and decrease property value D) increase equilibrium rental rates and increase property value

16) The expected stream of rental income is capitalized into value by converting expected future cash flows into present value through a process called:

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A) amortization.

B) discounting.

C) compounding.

D) accounting.

17) Capital markets can be divided into four main categories: private equity, public equity, private debt, and public debt. An example of a real estate asset that trades in the private equity market is: A) real property.

B) home mortgages.

C) equity REITs. D) mortgage backed securities.

18)

An example of a real estate asset that trades in the public debt market is: A) real property.

B) real estate operating companies.

C) equity REITs. D) commercial mortgage backed securities (CMBS).

19)

An example of a real estate asset that trades in the public equity market is: A) real property.

B) home mortgages.

C) equity REITs. D) commercial mortgage backed securities (CMBS).

20) Primarily through land use controls and property tax policy, which of the following branches of government has the largest influence on real estate values?

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A) local government B) state government C) national government D) foreign government

21) Competition for the currently available supply of locations and space coupled with the existing supply of leasable space, determines: A) the current level of rental rates for each submarket and property.

B) the riskiness of the expected cash flows of an income-producing property.

C) the timing of the expected cash flows of an income-producing property.

D) the cost of financing the purchase of a property.

22) Each property has unique features, whether it is its age, the building design of its structures, or its location. As such, real estate markets consist of assets that are considered: A) homogeneous.

B) heterogeneous.

C) substitutes.

D) complements.

23) Consistently the investment target of pension funds, publicly traded real estate companies, and real estate funds, large commercial properties valued well over $10 million are often referred to as: A) segmented property.

B) investment-grade property.

C) speculative-grade property.

D) immobile property.

24) The investment grade property market is typically targeted by all of the following groups of investors EXCEPT:

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A) pension funds.

B) individual investors.

C) listed equity REITs. D) real estate private equity funds.

25) The national government can have a significant impact on the value of real estate through: A) property tax policy.

B) income tax policy.

C) building Codes.

D) real estate licensing requirements.

26) By the fourth quarter of 2018, U.S. households had accumulated $15.5 trillion in housing equity, which represents about 15 percent of their net worth. What proportion of U.S. households own their home?

A) one-third B) one-half C) two-thirds D) three-fourths

27) The required rate of return that an individual demands on a real estate investment is determined in the: A) user market.

B) capital market.

C) government.

D) local market.

28) Investors in real estate can choose to hold properties directly in the private market or indirectly through publicly traded real estate securities. The market for buying, selling, and leasing real estate can be characterized by all of the following EXCEPT:

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A) localized markets.

B) highly segmented markets.

C) privately negotiated contracts.

D) low transaction costs.

29) Especially in terms of retail properties, which of the following attributes is considered the most likely to result in drastic value differences between otherwise similar properties?

A) structural attributes B) financing attributes C) location attributes D) land attributes

30) Capital markets can be divided into two broad categories: equity interests and debt interests. Equity investors in real estate expect to earn a return on their investment through: A) the collection of rent and price appreciation.

B) the collection of interest on the borrowed funds used to purchase the property.

C) the receipt of property taxes.

D) the case of a borrower default on required mortgage payments.

31) Considered a fundamental pricing metric in commercial real estate markets, the ratio of a property’s annual net income to its market value is more commonly referred to as a(n): A) appreciation rate.

B) capitalization rate.

C) discount rate.

D) internal rate of return.

32) Helping to constrain entry into real estate related occupations, which of the following branches of government is directly involved in establishing rules and regulations for the licensing of professionals in the field of real estate?

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A) local government B) state government C) national government D) foreign government

33) A primary determinant of the feasibility of new construction is the relationship between the current level of property prices and the cost of new construction. We would expect the supply of properties to: A) increase if current property values are greater than the cost of construction.

B) decrease if current property values are greater than the cost of construction.

C) increase if current property values equal the cost of construction.

D) decrease if current property values equal the cost of construction.

34) Equity investors can choose to participate indirectly in real estate markets by purchasing shares in publicly traded real estate companies. In doing so, investors benefit from all of the following EXCEPT: A) low transaction costs.

B) risk sharing amongst investors.

C) highly segmented markets.

D) decrease if current property values equal the cost of construction.

35) Real estate markets tend to be highly segmented due to the heterogeneous nature of the products. Which of the following examples depicts this issue of market segmentation?

A) A couple searching for a single-family detached unit is willing to consider other residential property types such as an attached townhouse unit or condominium.

B) A couple searching for a single-family detached unit has limited their search to homes in a single elementary school district C) A couple searching for a single-family detached unit has set a timeline for their search of 6 months, at which point they will renew their current apartment lease.

D) A couple searching for a single-family detached unit has limited their search to be in a specific price range between $350,000 and $400,000.

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36) If a property’s expected annual net income is $89,100 and its current market value is $1,060,000, the property’s capitalization rate is: A) 4.2%.

B) 8.4%.

C) 11.9%.

D) 33.6%.

Answer Key Test name: chapter 1 1) A 2) D 3) C 4) B 5) C 6) A 7) A 8) C 9) D 10) A 11) D 12) B 13) A 14) D 15) A 16) B 17) A 18) D Version 1

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19) C 20) A 21) A 22) B 23) B 24) B 25) B 26) C 27) B 28) D 29) C 30) A 31) B 32) B 33) A 34) C 35) D 36) B

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Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) A principal definition of real estate is as a bundle of rights associated with the possession, use, and disposition of property. Each of the following is a fundamental characteristic of property rights EXCEPT: A) they are enforceable by the government.

B) they apply only to tangible assets.

C) they are nonrevocable.

D) they are enduring.

2) Property rights can be divided into two classes, real and personal. Which of the following is an example of real property?

A) vehicles B) stocks and bonds C) patents D) commercial building

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

Of the following four rules for determining whether an object has become a fixture, which is the most dominant (i.e. if there is a conflict, which rule prevails)?

A) manner of the attachment B) character of the article and manner of adaptation C) intention of the parties D) relation of the parties

4) Based on your understanding of the rules for determining when an object becomes a fixture, which of the following items would most likely be considered a fixture at the time of sale?

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A) custom (built-in) bookshelves B) refrigerator in a single-family residence being sold C) fence installed by the tenant of a rental property D) curtains

5) Property rights can be dismantled into lesser bundles, referred to as interests, which can then be held by different individuals. Interests in real property that include possessions are referred to as: A) fixtures.

B) townships.

C) licenses.

D) estates.

6) Which of the following types of ownership estates is the most complete bundle of rights, and therefore carries the greatest value?

A) fee simple absolute B) fee simple conditional C) ordinary life estate D) legal life estate

7) Suppose an older homeowner lives adjacent to an expanding university that is interested in acquiring her residence for future university use. To allow the homeowner to continue to retain all rights of exclusive possession, use, and enjoyment during her lifetime, yet provide the university with the right of disposition, the university may want to purchase a(n): A) legal life estate with remainder interest.

B) conditional fee absolute with reverter interest.

C) ordinary life estate with remainder interest.

D) tenancy for years.

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8) While leasehold interests are considered estates, they differ from freehold estates in all of the following respects EXCEPT: A) leasehold estates are limited in time.

B) the right of disposition is diminished with a leasehold estate.

C) leasehold estates are not titled interests.

D) leasehold estates are possessory interests.

9) Nonposessory interests (i.e. bundles of real property rights that do not include possession) include all of the following EXCEPT: A) leasehold interests.

B) easements.

C) restrictive covenants.

D) liens.

10) An easement is the right to use land for a specific and limited purpose. Which of the following easements involves a relationship between two parcels of land, is a permanent feature of both parcels involved, and gives the dominant parcel some intrusive use of the servient parcel?

A) affirmative easement appurtenant B) negative easement appurtenant C) easement in gross D) license

11)

Which of the following is an example of a negative easement appurtenant?

A) a driveway easement across one parcel to another B) rights-of-way for roads C) a common drive easement where owners of adjoining lots must permit each other to use a driveway lying on their shaped property line D) a scenic easement used to restrict construction on adjacent parcels so as to preserve a valued view

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12) An important distinction both practically and conceptually is the difference between an easement and a license. All of the following characteristics pertain to a license EXCEPT: A) a license is revocable by the grantor.

B) a license can be granted orally.

C) a license is enduring.

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

13) A lien is an interest in real property that serves as security for an obligation. Which of the following is an example of a general lien?

A) property tax and assessment lien B) mortgage lien C) lien arising from a court judgment unrelated to ownership of the property D) mechanics’ lien

14)

Which of the following types of liens is automatically superior to any other lien?

A) property tax and assessment lien B) mortgage lien C) lien arising from a court judgment unrelated to ownership of the property D) mechanics’ lien

15) Once senior liens such as property tax, assessment, and CDD liens have been addressed in the case of default, the priority sequence for processing the remaining liens on the property is determined by the: A) relative size of the liens in dollar terms.

B) relative timing of the establishment of the lien.

C) relative reputation of the entity that established the lien.

D) relative complexity of the structure of the lien.

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16) Following the completion of a contract for construction or other improvements to a property, a contractor has the right to establish a lien on a property as protection against the case that a property owner defaults on the construction contract. This lien is more commonly referred to as a(n): A) property tax lien.

B) mortgage lien.

C) assessment lien.

D) mechanics’ lien.

17) Co-ownership can occur in a variety of ways, with significant variation in how the bundle of rights is jointly held. All of the following entities are forms of direct co-ownership EXCEPT: A) tenancy in common.

B) tenancy by the entirety.

C) condominium.

D) partnership.

18) Direct co-ownership implies that each co-owner holds a titled interest in the property, but without exclusive possession with respect to the other co-owners. Which of the following types of direct co-ownership is considered the closest to the fee simple absolute estate?

A) tenancy in common B) tenancy by the entirety C) condominium D) tenancy at Will

19) Which of the following types of direct co-ownership is a form of joint tenancy for husband and wife created by marriage that protects each spouse from liens arising from either spouse alone?

A) tenancy in common B) tenancy by the entirety C) condominium D) tenancy at Will

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20) Which of the following types of direct co-ownership combines single person ownership with tenancy in common?

A) cooperative B) tenancy by the entirety C) condominium D) partnership

21) Which of the following forms of co-ownership, historically used for apartment buildings, is not considered a form of true direct co-ownership, but rather qualifies as a proprietary corporation?

A) cooperative B) tenancy by the entirety C) condominium D) partnership

22) Property rights created from marriage have a clear implication for real estate transactions.

Which of the following marital property rights gives a spouse a one-half claim on all property acquired “from the fruits of the marriage?”

A) dower B) curtesy C) elective share D) community property

23) Restrictive covenants impose constraints on the use of the land, yet are limited in terms of their enforcement. All of the following are true regarding the enforcement of restrictive covenants EXCEPT:

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A) courts have been reluctant to maintain restrictive covenants for an unreasonably long time and in some cases states have enacted a time limit on their applicability.

B) courts may refuse to enforce restrictive covenants due to changing neighborhood character.

C) courts may refuse to enforce restrictive covenants due to abandonment of the property.

D) restrictive covenants are public in nature and therefore can be enforced by those who do not hold a legal interest in the property.

24) When multiple individuals have use of a property, but their interests are not simultaneous, this type of co-ownership is referred to as a: A) cooperative.

B) tenancy by the entirety.

C) condominium.

D) timeshare.

25) In some states, mining companies are deemed to own not only the minerals but also the space the minerals occupied before they were removed, thereby earning the distinction of ownership states. However, when the owner of an oil or gas well is able to claim all that is pumped from it, regardless of whether the oil or gas migrated from adjacent property, this is referred to as a _____________ state.

A) manner of attachment B) law of capture C) intention of the parties D) relation of the parties

26) Bill and Mike go in together to purchase 342 acres of land to use for hunting and family vacations. Ten years later, Bill dies and Bill's wife wants to sell his half of the land. Mike informs her that, unfortunately, she has no claim to the land and that upon Bill’s death, his ownership interest transferred to Mike. What type of co-ownership did Bill and Mike have?

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A) tenancy by the entireties B) tenancy in common C) joint tenancy D) relation of the parties

27) The City of Grand Rapids installed a new water main on Oak Street. The city then decided to charge the property owners along Oak Street a proportional cost of the new water main. If a property owner refuses to pay their proportional share of the cost, the city may file a(n): A) property tax lien.

B) assessment lien.

C) general lien.

D) mechanics' lien.

28) Jeff owns 150 acres between a highway and a public beach. The state would like to build a road directly from the highway to the beach across a number of beach front properties including Jeff’s. The space for this road would be considered a(n): A) implied easement.

B) easement in gross.

C) negative easement appurtenant.

D) positive easement appurtenant.

29) Brian just began graduate school at the local university and is looking to rent an apartment. A family friend has decided to lease him a two bedroom, one bathroom cottage through an oral agreement with no definite lease period outlined. Which of the following leasehold estates best describes Brian’s situation?

A) tenancy for years B) tenancy at sufferance C) periodic tenancy D) tenancy by the entirety

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30)

A leasehold interest for a specific period of time is more commonly referred to as: A) tenancy for years.

B) tenancy at sufferance.

C) periodic tenancy.

D) tenancy at will.

31) Tom recently purchased a home in a residential subdivision. While mowing his lawn and planting new shrubs for the first time since moving in, Tom’s neighbor came outside to inform him that he was violating one of the subdivision’s rules which required the use of a specific professional lawn service for all property landscaping needs. Assuming this requirement can be enforced by the subdivision authority, this would be an example of a(n): A) easement.

B) restrictive covenant.

C) lien.

D) estate.

32) When identifying an easement appurtenant, the parcel of land that benefits from the right to use the land in question is referred to as the: A) dominant parcel.

B) servient parcel.

C) licensed parcel.

D) gross parcel.

33) When identifying an easement appurtenant, the parcel of land that is constrained or diminished by the easement is referred to as the: A) dominant parcel.

B) servient parcel.

C) licensed parcel.

D) gross parcel.

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34) Real estate can be viewed as a bundle of rights. How these bundles of rights are grouped together determines the type of ownership interest an individual (or group of individuals) can stake claim to. In an ordinary life estate with remainder interests, which of the following rights is detached from the traditional bundle of rights that typically defines a fee simple absolute interest?

A) possession B) use C) disposition D) enjoyment

35)

Which of the following types of estates involves the weakest bundle of rights?

A) fee simple absolute B) legal life estate C) ordinary life estate D) tenancy at will

36)

The distinctive feature of a joint tenancy is the: A) right of survivorship.

B) right of community property.

C) right of separate property.

D) right of cooperation.

37) Since an easement is a non-possessory interest, it is important to understand the right of disposition that is associated with it. In which of the following types of easements is the right of disposition claimed as part of the easement?

A) implied easement B) easement in gross C) negative easement appurtenant D) positive easement appurtenant

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38) Requirements to create a joint tenancy are quite restrictive. They require the presence of the “four unities,” which include all of the following EXCEPT: A) condition.

B) title.

C) interest.

D) possession.

39)

Which of the following is an example of an affirmative easement appurtenant?

A) a driveway easement across one parcel to another B) a sunlight easement C) right of way for a railroad D) conservation easement

40) Which of the following leasehold estates best describes the situation in which a tenant who previously occupied a property under a legitimate leasehold interest refuses to vacate?

A) tenancy for years B) tenancy at will C) periodic tenancy D) tenancy at sufferance

41) All of the following are considered indirect forms of co-ownership of real estate assets EXCEPT: A) limited liability company.

B) real estate investment trust.

C) S-corporation.

D) condominium.

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

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27) B 28) B 29) C 30) A 31) B 32) A 33) B 34) C 35) D 36) A 37) B 38) A 39) A 40) D 41) D Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) A deed is a special form of written contract used to convey a permanent interest in real property. Unlike most contracts, a deed requires: A) both parties to be legally competent and of legal majority age.

B) only the grantee to be legally competent and of legal majority age.

C) only the grantor to be legally competent and of legal majority age.

D) both parties to make promises to perform.

2) In a deed, the person or entity conveying the real property interest is more commonly referred to as the:

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A) grantor.

B) grantee.

C) guarantor.

D) guarantee.

3) The type of deed offered by the grantor is communicated through a phrase such as “does herby grant, bargain, sell and convey unto . . .” This clause is referred to as the: A) recital of consideration.

B) words of conveyance.

C) covenant.

D) habendum clause.

4) The covenants in a deed are the most important differences among types of deeds. Which of the following covenants promises that the grantor truly has good title and the right to convey it?

A) covenant of seizin B) covenant against encumbrances C) covenant of quiet enjoyment D) exceptions and reservation clause

5) Which of the following clauses contained in a deed defines or limits the type of interest being conveyed?

A) recital of consideration B) words of conveyance C) covenant D) habendum clause

6) Although deeds can only deliver what a grantor actually owns, they can still vary in “quality.” Which of the following types of deeds is considered to be the “highest quality” because it contains the full set of legal promises the grantor can make?

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A) general warranty deed B) special warranty deed C) deed of bargain and sale D) quitclaim deed

7) Considered a “questionable conveyance of title” by most courts, which of the following types of deeds is worded to imply no claim of title, but rather only convey what interest the grantor actually has? (Hint: This type of deed may be used by a developer to convey certain lands of a subdivision to the local government through dedication.)

A) general warranty deed B) special warranty deed C) deed of bargain and sale D) quitclaim deed

8) While several kinds of real property conveyances result from events beyond the control of the grantor, the majority of conveyances are voluntary through a deed. Which of the following is an example of a voluntary conveyance of real property with a deed?

A) patent B) probate C) condemnation D) implied easement

9) At the death of a property owner, property will convey either in accordance with a will or without a will. When a will dictates the distribution of the decedent’s real property, this mode of conveyance is more commonly referred to as: A) testate.

B) intestate.

C) probate.

D) descent.

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10) At the death of a property owner, property will convey either in accordance with a will or without a will. If a will dictates the distribution of the decedent’s real property, the property is said to be: A) patented.

B) devised.

C) conveyed by the law of descent.

D) dedicated.

11) While the vast majority of conveyances of real property are private grants through a deed, there are multiple ways in which voluntary conveyance can occur without a deed. Which of the following types of easements can occur if a landowner gives an adjacent landowner permission to depend on her land? (E.g. A landowner may give a neighbor permission to rely on sewer access or drainage across his or her land.)

A) easement by prior use B) easement of necessity C) easement by estoppel D) dedication

12) When a landowner subdivides land in a way that causes a parcel to be landlocked, it is possible for property to be voluntarily conveyed without a deed. If the landlocked parcel has no prior path of access, which of the following types of easements will automatically be created to make the land useful?

A) easement by prior use B) easement of necessity C) easement by estoppel D) dedication

13) An owner of land may involuntarily and unknowingly give up the rights to land. When a fee simple interest is conveyed to a new owner without a deed and without the consent or knowledge of the original owner, this is said to be conveyed by:

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A) prescription.

B) adverse possession.

C) accretion.

D) reliction.

14) All of the following are modes of conveying real property voluntarily without a deed EXCEPT: A) implied easement.

B) easement by estoppel.

C) dedication.

D) easement by prescription.

15) All of the following are modes of conveying real property involuntarily without a deed EXCEPT: A) title by adverse possession.

B) easement by estoppel.

C) action of water.

D) easement by prescription.

16) Once a document conveying an interest in real property is placed in the public records it is binding on the public, whether or not they make an effort to learn of it. Based on the common law tradition, this policy is known as the: A) Statute of Frauds.

B) doctrine of constructive notice.

C) habendum clause.

D) actual notice.

17) A contract for sale of real estate usually calls for the seller to provide evidence of title as a requisite to completing the sale. Today, the predominant medium through which a seller meets this requirement is by providing:

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A) only a title abstract.

B) only an attorney’s opinion of title.

C) only a title insurance commitment.

D) only a seller’s disclosure.

18) A law requiring any contract conveying a real property interest to be in writing in order to be enforceable is a modern application of the: A) Statute of Frauds.

B) doctrine of constructive notice.

C) habendum clause.

D) actual notice.

19) Unlike other forms of evidence of title, title insurance guards the grantee against certain risks. However, there are a number of important limits to title insurance. Which of the following is an example of the limits to title insurance?

A) It does not protect the grantee from the threat of physical damage to the property.

B) It does not protect a grantee against the legal costs of defending the title.

C) It does not protect a grantee against loss of the property in case of an unsuccessful title defense.

D) It does not protect against legal attack on the owner’s title arising from a claim that diminishes the owner’s rights of use.

20) Recognizing that only recent conveyances alter the status of title, states have established laws that set limits on how far back a title search must go. These laws are commonly referred to as: A) Statute of Frauds.

B) recording statutes.

C) encroachments.

D) marketable title laws.

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21) Laws requiring that a document conveying an interest in real property must be placed in the public records are more commonly referred to as: A) covenants.

B) recording statutes.

C) probates.

D) marketable title laws.

22) One of the most important requirements of a land description is for it to be unambiguous.

Which of the following methods of property description is the most unambiguous and is appropriate for use in legal documents?

A) street address B) tax parcel number C) reference to prominent features of the land (e.g. monuments, river banks, roads) D) metes and bounds

23) The most flexible method of land description, capable of describing even the most irregular of parcels, can be described as a very precise, compass-directed walk around the boundary of a parcel. This method is commonly referred to as: A) metes and bounds.

B) subdivision plat lot and block number.

C) government rectangular survey.

D) tax parcel number.

24) Most often used in the description of urban property, which of the following methods of land description contains information regarding the location of various easements and may even contain a list of restrictive covenants?

A) metes and bounds B) subdivision plat lot and block number C) government rectangular survey D) tax parcel number

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25) Initially used to survey the Old Northwest Territory (Ohio, Indiana, Illinois, and Michigan) in 1789, which of the following methods of land description relies on townships and section numbers as essential units of identification?

A) metes and bounds B) subdivision plat lot and block number C) government rectangular survey D) tax parcel number

26) Which of the following covenants in a deed promises that the property will not be claimed by someone with a better claim to title?

A) covenant of seizin B) covenant against encumbrances C) covenant of quiet enjoyment D) exceptions and reservation clause

27) Consider the following excerpt from a sample deed: “The Seller is lawfully seized in fee simple of the above described property, less and except a prior reservation of all oil, gas and mineral rights in the property conveyed.” The underlined portion of the preceding statement represents which of the following basic requirements of a deed?

A) habendum clause B) recital of consideration C) covenant against encumbrances D) exceptions and reservations clause

28) Consider the following excerpt from a sample deed: “The Seller, for itself and its heirs, hereby covenants with the Buyer, its heirs and assigns forever, that the Seller is lawfully seized in fee simple of the above described property.” The underlined portion of the preceding statement represents which of the following basic requirements of a deed?

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A) habendum clause B) recital of consideration C) words of conveyance D) exceptions and reservations clause

29) Consider the following excerpt from a sample deed: “The Seller covenants with The Buyer that it has a good right to convey, that the property is free from all encumbrances, and that it forever warrants to defend all of the property so granted to The Buyer against every person lawfully claiming the same.” Based on your understanding of the relation between a deed’s covenants and the type of deed being conveyed, which type of deed is being conveyed in the statement above?

A) general warranty deed B) special warranty deed C) deed of bargain and sale D) quitclaim deed

30) In order for a deed to be a valid conveyance of property, there must be an observable, verifiable transfer of the deed to the grantee. Typically this is accomplished when the grantor hands the deed to the grantee at closing. Which of the following basic requirements of a deed does this represent?

A) acknowledgment B) delivery C) words of conveyance D) recital of consideration

31) Which of the following covenants in a deed promises that the property is not burdened by liens, easements or other limitations, except as noted in the deed?

A) covenant of seizin B) covenant against encumbrances C) covenant of quiet enjoyment D) exceptions and reservation clause

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32) The quality of deeds differs based on the types of covenants they include. The special warranty deed is identical to the general warranty deed in all ways EXCEPT its conveyance of which of the following covenants?

A) covenant of seizin B) covenant against encumbrances C) covenant of quiet enjoyment D) exceptions and reservation clause

33) The habendum clause defines or limits the type of interest being conveyed. The legal tradition recognizes certain words and phrases as signals of various real property interests. For example, the use of the phrase, “as long as,” can communicate which of the following types of interests?

A) fee simple absolute B) easement C) conditional fee with reverter D) tenancy for years

34) The description of land in a deed must be unambiguous. All of the following would be considered acceptable legal descriptions of land EXCEPT: A) street address.

B) subdivision plat lot and block number.

C) government rectangular survey.

D) metes and bounds.

35) In creating evidence of title, a title search attempts to identify the sequence of conveyances passing ownership down through time. This sequence is more commonly referred to as the:

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A) title abstract.

B) title commitment.

C) chain of title.

D) root of title.

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

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27) D 28) A 29) A 30) B 31) B 32) B 33) C 34) A 35) C Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) While most real property in the United States is privately owned, government regulations limit private property use and therefore play an important role in the determination of property value. Proponents of government intervention argue that regulation is needed to address the unintended and unaccounted for consequences of one land user upon others, more commonly referred to as: A) incomplete information.

B) locational monopoly.

C) externalities.

D) urban sprawl.

2) Externalities can play an important role in determining a property’s price, either by adding value through positive externalities or by diminishing value through negative externalities. Which of the following is most likely to be considered a negative externality?

A) nearby parks and recreation facilities B) quality neighborhood schools C) public assistance facilities such as homeless shelters D) well-kept landscapes

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3) Development taking place in rural areas well beyond the urban fringe is commonly referred to as: A) urban sprawl.

B) holdout.

C) urban service areas.

D) homestead.

4) It was not until the late 1960’s that land use controls moved to the forefront of public interest, as the belief that the environment was an endless and costless resource was replaced with the notion that the world was a closed system with limited space, air, water, and other resources. Environmentalists coined which of the following terms to refer to this new point of view?

A) smart growth B) The Silent Spring C) spaceship earth D) urban sprawl

5) After a structure is built, it is impractical for even a building expert to fully assess the quality of the construction and the safety hazards it may harbor. This is an example of which of the following problems that plagues private real estate markets?

A) externalities B) incomplete information C) locational monopoly D) holdout

6) Growth management laws at the state level require local jurisdictions to plan for and meet certain requirements. One such requirement prohibits local development unless adequate infrastructure, schools, police/fire protection, and social services have been put in place first.

This requirement is referred to as the:

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A) economic and environmental impact requirement.

B) concurrency requirement.

C) affordable housing requirement.

D) extraterritorial jurisdiction requirement.

7) Proposals for large-scale developments must be accompanied by studies that analyze the project’s effect on the surrounding area. This requirement is referred to as the: A) economic and environmental impact requirement.

B) concurrency requirement.

C) smart growth requirement.

D) extraterritorial jurisdiction requirement.

8) A contemporary planning movement that explicitly advocates a traditional grid pattern of development designed to give pedestrian life priority over motor vehicles (e.g., including narrowed streets with houses close to the street and garage access through side alleys) is commonly referred to as: A) urban sprawl.

B) urban service area.

C) traditional residential planning.

D) new urbanism.

9) Which of the following tools of public land use control represents the earliest method of police power to regulate land use? (Hint: Standards for energy efficiency and sustainability are the most recent trends in the application of this land use control.)

A) subdivision regulation B) zoning C) building codes D) planned unit developments

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10) When a zoning ordinance is revised, some existing land uses then fall outside the new zoning classification. These land uses are referred to as: A) special uses.

B) nonconforming uses.

C) conforming uses.

D) exclusionary uses.

11) When land use controls impose exceptional hardship and loss of value, a relief mechanism must be provided. This relief is referred to as a: A) building code.

B) zoning ordinance.

C) comprehensive plan.

D) variance.

12) In order for the board of adjustment to approve a variance, all of the following conditions must be met EXCEPT: A) the owner must be unable to use the lot as zoned.

B) the condition is common to other parcels of land in the vicinity.

C) the variance must not materially change the character of the neighborhood.

D) the condition is unique to the lot.

13)

A traditional zoning ordinance includes all of the following EXCEPT: A) minimum setback requirements.

B) minimum lot dimensions.

C) provisions for special use districts.

D) performance standards.

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14) State and federal control of land uses has increased greatly over the past 40 years due in part to an increased awareness of environmental hazards. Which of the following federal environmental control laws was responsible for establishing the “Superfund” to finance emergency responses and cleanups of abandoned and unregulated waste dumps?

A) Clean Water Act B) Resource Conservation and Recovery Act C) Toxic Substances Control Act D) Comprehensive Environmental Response Compensation and Liability Act

15) Which of the following federal environmental control laws was responsible for giving the EPA “cradle-to-grave” authority over the handling of hazardous waste?

A) Clean Water Act B) Resource Conservation and Recovery Act C) Toxic Substances Control Act D) Comprehensive Environmental Response Compensation and Liability Act

16) Which of the following federal environmental control laws was responsible for giving the EPA authority to control discharges of pollutants into waters of the United States?

A) Clean Water Act B) Safe Drinking Water Act C) Toxic Substances Control Act D) Resources Conservation and Recovery Act

17) Which of the following federal environmental control laws was responsible for giving the EPA authority to monitor and control 75,000 industrial chemicals, and new ones that are created?

A) Clean Water Act B) Safe Drinking Water Act C) Toxic Substances Control Act D) Resources Conservation and Recovery Act

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18) Negative externalities can diminish a property’s value by imposing costs on the community at large. In order to offset this detrimental impact, economists advocate “internalizing” these externalities by implementing: A) performance standards.

B) impact fees.

C) growth moratoriums.

D) planned unit developments.

19) The right of government to acquire private property, without the owner’s consent, for public use in exchange for just compensation is referred to as: A) inverse condemnation.

B) regulatory taking.

C) eminent domain.

D) dedication.

20) All of the following statements are true in describing the determination of just compensation EXCEPT: A) The value of the property is based on its highest and best use at the time.

B) The value of the property is determined solely by its current use.

C) The value is the amount that restores the property owner to a financial position equivalent to that existing before the property was taken.

D) The value is the market value of the property if completely taken, or the total value of all financial loss if partially taken.

21) Real estate taxes represent the largest single source of revenue for a large portion of local governments. Most property taxes are applied in relation to the value of the property, or in other words, they are:

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A) effective tax rates.

B) ad valorem taxes.

C) tax-exempt.

D) regressive.

22) A developer plans to place a subdivision slightly outside the city limits in an area that is rapidly developing. However, the city claims to have the right to control urban development even in the proposed area. The right the city is attempting to invoke is referred to as: A) extraterritorial jurisdiction.

B) urban service area.

C) comprehensive plan.

D) growth constraint.

23) When entities such as roadways and utilities in subdivisions become the property and responsibility of the local government to maintain, this process is more commonly referred to as: A) dedication.

B) condemnation.

C) regulatory taking.

D) zoning.

24) Special assessments are levied to pay for specific improvements that benefit a particular group of properties. All of the following characteristics of special assessments are true EXCEPT: A) they are considered ad valorem taxes.

B) they are applied as pro rata charges.

C) they are levied directly on the properties benefited.

D) they are commonly used to finance streets, storm water systems, sidewalks, and other area improvements.

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25) One of the main criticisms of property taxes is that the property tax of lower income households is higher than that of higher income households, as a percentage of their respective incomes. In other words, taxes are criticized for being: A) regressive.

B) comprehensive.

C) concurrent.

D) extraterritorial.

26) In the state of Florida, for example, homeowners may qualify for a tax exemption in which up to $50,000 will be deducted from the assessed value of the property before taxes are calculated as long as the property owner occupies a home as the family’s principal residence and has claimed residency within the state. This exemption is better known as the: A) ad valorem exemption.

B) affordable housing exemption.

C) growth moratorium.

D) homestead exemption.

27) Zoning ordinances that tend to exclude lower income groups by large lot size, or that do not adequately provide low- and moderate-income housing are referred to as: A) special uses.

B) nonconforming uses.

C) conforming uses.

D) exclusionary uses.

28) A public planning movement that explicitly advocates a cul-de-sac hierarchy of development, an automobile oriented society, and separated land use is more commonly referred to as: A) urban sprawl.

B) urban service area.

C) traditional residential planning.

D) new urbanism.

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29) Eminent domain is the right of government to acquire private land, without the owner’s consent, for public use, with due process and just compensation. The legal procedure for exercising the right of eminent domain is referred to as: A) growth restriction.

B) urban sprawl.

C) blighted development.

D) condemnation.

30) Traditional zoning regulations are criticized for often being too rigid in forcing uniform types of development. One proposed solution to this issue allows traditional zoning requirements to vary in exchange for an enhancement to the community, such as the construction of a park.

This is more commonly referred to as a: A) planned unit development.

B) performance standard.

C) impact fee.

D) growth restriction.

31) In the history of eminent domain, the Kelo v. New London, Connecticut decision of the U.S. Supreme Court in 2005 affirmed the possibility of a community being: A) prohibited from using eminent domain.

B) restricted to use of eminent domain only for actual government (public) land uses.

C) able to use eminent domain to acquire property for private development if it serves public purpose and the current land use is blighted.

D) able to use eminent domain to acquire property for private development if it serves public purpose even if the current land use is not blighted.

32) In efficient financial markets, unregulated competitive bidding should bring about the most productive use of an asset and the price paid for that asset should reflect fair value based on its usefulness. In real estate, this is not always the case. For example, there is no substitute for certain pieces of land which gives the owner a bargaining advantage in determining the value of the land. This feature of real estate markets is commonly referred to as:

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A) incomplete information.

B) locational monopoly.

C) positive externality.

D) negative externality.

33) Nearly half of states in the U.S. use the sale of tax lien certificates to manage defaulted property taxes. The certificates are auctioned to the public at: A) the face value of the property taxes due.

B) the assessed value of the home.

C) a discount from the face value of the property taxes due.

D) a premium of the assessed value of the home.

34)

The most recent approach to zoning, form-based zoning, creates a map by segregation of: A) land uses.

B) building shapes.

C) property taxes.

D) performance standards.

35) While property tax rates can vary across geographic regions, ad valorem taxes are typically levied at rates between: A) 1.0 to 4.0 percent.

B) 5.0 to 9.0 percent.

C) 10.0 to 15.0 percent.

D) 16.0 to 20.0 percent.

36) Most communities contain a number of tax-exempt properties. All of the following are typically included in the tax-exempt property classification EXCEPT:

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A) places of worship.

B) universities.

C) government owned properties.

D) single-family homes.

37) In considering the acquisition of real property, it is important to remember that certain factors may limit ownership rights. Which of the following is an example of a situation in which ownership rights can be fully removed from the property?

A) land use controls B) leasehold interests C) home owner association (HOA) bylaws D) defaulted lien

38) Given the following information, compute the property tax rate for the community in percentage terms: Total budget expenditures: $108 million Total non-property tax income: $50 million Total assessed value of all properties: $2 billion Total exemptions: $550 million A) 2.5% B) 4.0% C) 10.0% D) 12.0%

39) Tax rates are usually stated in mills. Assuming the tax rate in percentage terms is 6.5%, convert this rate to mills.

A) 0.065 mills B) 6.5 mills C) 65 mills D) 650 mills

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40) Given the following information, compute the effective tax rate for the particular piece of property in percentage terms: Market value of property: $325,000 Assessed value of property: $250,000 Exemptions: $50,000 Taxes paid: $5,363 A) 1.50% B) 2.35% C) 1.65% D) 2.68%

41) Given the following information, compute the taxable value for the particular piece of property in dollar terms: Market value of property: $500,000 Assessed value of property: 85 % of the market value of the property Exemptions: $50,000 Taxes paid: $8,250 A) $75,000 B) $375,000 C) $416,750 D) $425,000

42) Given the following information, calculate the total annual tax liability of the homeowner: Market value of property: $350,000 Assessed value of property: 40 % of the market value Exemptions: $2,000 Millage Rate: 33.95 mills A) $4,685.10 B) $4,753.00 C) $11, 882.50 D) $46,851.00

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43) Given the following information, calculate the effective tax rate expressed in mills: Market value of property: $280,000 Assessed value of property: 50 % of the market value Exemptions: $2,000 Annual tax liability: $4,685.10 A) 1.69 mills B) 3.35 mills C) 16.73 mills D) 33.95 mills

44) Given the following information, calculate the total annual tax liability of the homeowner: Market value of property: $350,000 Assessed value of property: 40 % of the market value Exemptions: $2,000 State Millage Rate: 0.25 mills County Millage Rate: 13.70 mills A) $34.50 B) $1,890.60 C) $1,925.10 D) $4,685.10

45) Given the following information, calculate the total annual tax liability of the homeowner: Market value of property: $537,500 Assessed value of property: 60 % of the market value Exemptions: $2,500 School District Millage Rate: 29.25 mills County and Township Millage Rate: 5.75 mills

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A) $7,437.50 B) $11,200.00 C) $11,287.50 D) $188,125.00

46) To determine a property’s annual tax liability in dollars, it is useful to first convert the millage rate to an annual percentage. If the millage rate is 25 mills, determine the property tax rate in percentage form.

A) 0.025% B) 0.25% C) 2.50% D) 25.00%

47) Given the following information, compute the property tax rate for the community in mills. Total budget expenditures: $250 million, Total non-property tax income: $150 million, Total assessed value of all properties: $5 billion, Total exemptions: $900 million.

A) 2.00 mills B) 2.43 mills C) 20.0 mills D) 24.3 mills

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

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27) D 28) C 29) D 30) A 31) D 32) B 33) C 34) B 35) A 36) D 37) D 38) B 39) C 40) C 41) B 42) A 43) C 44) C 45) B 46) C 47) D Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) A city’s potential for growth or its susceptibility to decline is determined by a set of economic activities that the city provides for the world beyond its boundaries. Economists refer to this set of activities as a city’s:

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A) linkages.

B) economic base.

C) local economic activities.

D) economies of scale.

2) The demand for access between land uses is considered the “gravity” that holds a city together. These relationships between land uses are commonly referred to as: A) linkages.

B) economic bases.

C) local economic activities.

D) economies of scale.

3) A city’s economic base can be viewed in terms of a multiplier process, in which the money that is brought in through export activities is then respent within the city. Which of the following economic activities is the least likely to be considered a high-impact or high-multiplier economic base activity?

A) tourism B) retirement C) computer assembly D) specialized medical services

4) The magnitude of an economic base multiplier depends upon the amount of money that “leaks” out through expenditures outside of the city limits. The economic multiplier tends to be higher with each of the following EXCEPT: A) a higher percentage of local household income is respent within the city.

B) the larger the city is.

C) the less isolated the city is from other cities.

D) the more tourism a city brings in.

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5) In supporting their local economic base, cities may at times incur expenses from doing business with entities located outside of their local community (e.g., in cities with high tourist activity, souvenirs are likely to come from low-wage countries). These expenses are an example of ______ from the local economy.

A) linkages B) leakages C) exports D) agglomeration

6) Activities in a city that serve local businesses and households will recirculate the income derived through a city’s economic base. These types of activities are more commonly referred to as: A) primary activities.

B) secondary (or local economic) activities.

C) economic base activities.

D) export activities.

7) In contrast to base activities, local economic activities (or secondary activities) serve the local business and households that are recirculating the income derived through the city’s economic base. In other words, we can distinguish local economic activities from export activities by thinking about whether or not the activity brings money into the city from outside sources. Which of the following activities is NOT an example of land use for local economic activity?

A) retail centers B) restaurants C) automotive services D) manufacturing Center

8) Because a city’s output capacities change slowly over time, it is important to understand the supply side (long-run) factors affecting urban growth. Which of the following would NOT be considered a supply-side factor that impacts a city’s economic growth?

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A) nature of the available labor force B) quality of life within a community C) cooperation of local leadership and government D) city’s export activity

9) Cities such as New York are able to host a variety of complex industries because of the development of specialized resources that support their growth. When specialized resources emerge in response to demand from multiple industries, this is referred to as: A) industry economies of scale.

B) agglomeration economies.

C) locational monopoly.

D) economic inefficiencies.

10) The growth of the motion picture industry in Los Angeles, the petrochemical industry in Houston, the software industry in “Silicon Valley,” are all examples of how the growth of an industry within a city can create cost advantages for future growth. Economists refer to this phenomenon as: A) industry economies of scale.

B) agglomeration economies.

C) locational monopoly.

D) economic inefficiencies.

11) According to the bid-rent model, which of the following changes in the model’s underlying assumptions would most likely result in a decrease in rents for properties closest to the central business district (CBD)?

A) an increase in an individual’s hourly wage B) an increase in the average traveling speed of the individual’s commute C) an increase in the number of households attempting to live in the area D) an increase in the number of days an individual must commute to work

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12) According to the bid-rent model, which of the following individuals would be the one most likely to live closest to the central business district (CBD)? (Hint: Assume that work locations are located adjacent to each other at the center of the CBD.) A) a barista at the local coffee shop who uses a car to commute.

B) a doctor at the city hospital who uses a car to commute.

C) a barista at the local coffee shop who must walk to work.

D) a doctor at the city hospital who must walk to work.

13) Within the framework of the bid-rent model, as rents increase with proximity to the central business district (CBD), the tendency is for development to: A) spread to the outskirts of the city.

B) build upward on lots within the CBD to allow multiple tenants.

C) cease completely.

D) focus on low-income housing projects.

14) An early model of land use is the concentric ring model of urban form developed by E.W. Burgess. Of the following land uses, which would be closest to the downtown area of the central business district (CBD) according to Burgess’ model?

A) blue-collar residential land use B) a zone of transition containing warehousing and other industrial land uses exists between the downtown area and the residential area C) white-collar clerical residential land use D) executive residential land use

15) Which of the following models of urban form is characterized by radial corridors or wedges representing the pattern of residential land use in relation to the location of the central business district (CBD)?

A) bid-rent model B) concentric circle model C) sector model D) multi-nuclei model

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16) Which of the following models of urban form is characterized by smaller central business districts (CBDs) located on the outskirt of the city?

A) bid-rent model B) concentric circle model C) sector model D) multi-nuclei model

17) The location of competitors within a particular land use area may be influenced by whether the types of services and products are convenience activities or comparison activities.

Which of the following is an example of a comparison activity?

A) supermarket B) coffee boutique C) fast-food restaurant D) apparel store

18) Services and products that users seek to obtain from the closest available source are more commonly referred to as: A) comparison activities.

B) convenience activities.

C) concentric activities.

D) segmented activities.

19) Based on your understanding of the differences between convenience and comparison activities, which of the following property subtypes is designed to provide mostly comparison goods and services to its customers?

A) regional mall B) neighborhood shopping center (with grocery anchor) C) power center (with discount store anchors) D) stand-alone retail store

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20) Providers of convenience activities find it profit-maximizing to disperse over the region of potential customers to the point where each establishment is equidistant from another and is separated by the minimum distance that allows sufficient customers to support each establishment. The resulting pattern of establishment locations is referred to as: A) central place pattern.

B) clustering.

C) concentric circle.

D) multi-nuclei.

21) Most research oriented universities have many different colleges, each with separate administrations, students, curricula, and facilities. However, the university continues to exist as a total unit because of: A) industry economies of scale.

B) locational monopoly.

C) economic inefficiencies.

D) negative externalities.

22) A fishing company was formed in Juneau, Alaska. Over the next decade, a canning plant, a processing plant, and a boat repair facility also opened in Juneau. This is an example of: A) industry economies of scale.

B) agglomeration economies.

C) location quotient.

D) linkages.

23) Six suburban office buildings have been constructed along six consecutive blocks in Roseland, New Jersey. This is an example of: A) central place pattern.

B) clustering.

C) concentric circle.

D) multi-nuclei.

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24) Understanding the revenue generating ability of the core export activities of a local area has important implications on the market value of real estate. When the income that these activities generate is re-spent within the community on other local goods and services, the community is benefiting through a: A) dividend process.

B) multiplier process.

C) forced saving process.

D) diversification process.

25) An important effect of agglomeration economies on real estate is its impact upon market risk. Based on your understanding of this relation, which of the following statements is TRUE? A) Properties located in a city with more advanced development of agglomeration economies will carry more risk and therefore suffer a larger price decline during an economic downturn than comparable properties in a city with less agglomeration.

B) Properties located in a city with more advanced development of agglomeration economies will carry less risk and therefore suffer a larger price decline during an economic downturn than comparable properties in a city with less agglomeration.

C) Properties located in a city with more advanced development of agglomeration economies will carry more risk and therefore suffer a smaller price decline during an economic downturn than comparable properties in a city with less agglomeration.

D) Properties located in a city with more advanced development of agglomeration economies will carry less risk and therefore suffer a smaller price decline during an economic downturn.

26) Based on your understanding of the effect of agglomeration economies in real estate, you would expect institutional investors to most favor real estate investments in which of the following areas?

A) small urban markets B) large urban markets C) small rural markets D) large rural markets

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27) According to the bid-rent model, which of the following changes in the model’s underlying assumptions would most likely result in an increase in rents for properties closest to the central business district (CBD)?

A) a decrease in an individual’s hourly wage B) a decrease in the average traveling speed of the individual’s commute C) a decrease in the number of households attempting to live in the area D) a decrease in the number of days an individual must commute to work

28) According to the bid-rent model, which of the following individuals would be the one least likely to live closest to the central business district (CBD)? (Hint: Assume that work locations are located adjacent to each other at the center of the CBD.) A) a barista at the local coffee shop who uses a car to commute B) a doctor at the city hospital who uses a car to commute C) a barista at the local coffee shop who must walk to work D) a doctor at the city hospital who must walk to work

29) Within some types of land use, business location may be determined by the type of service or products that are offered to consumers. Based on your understanding of the differences between comparison and convenience activities, which of the following providers would operate in the convenience activity space?

A) supermarket B) car dealership C) large public university D) apparel store

30) Using the following information, determine the location quotient for this industry: Percentage of employment in financial services industry within the local community: 15% Percentage of employment in financial services industry for the entire U.S.: 4.4%.

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A) 0.3 B) 3.4 C) 10.6 D) 19.4

31) An individual works downtown and pays $600 per month in rent for an apartment located 10 miles from her office. She has calculated that she spends 30 minutes per day driving each way to the office and it costs her $4 per day in gas and lost productivity. Using the framework of the bid-rent model, how much would she be willing to pay for an apartment downtown, assuming a 20 workday month?

A) $80 B) $440 C) $520 D) $680

32) Using the following information, determine the location quotient for Motor City.

Employment in Motor Vehicle Manufacturing within Motor City: 12,643 Total Employment in Motor City: 560,379 Employment in Motor Vehicle Manufacturing (nationally): 152,750 Total Employment (nationally): 106,201,232 A) 0.1 B) 12.1 C) 15.7 D) 44.3

33) A new faculty member at the local university pays $1500 per month to rent an apartment in the downtown area. She teaches on campus 3 days a week and works from home the remaining 2 days. On the days in which she must commute, given the heavy traffic congestion, it takes her 2 hours to commute from downtown to campus. According to the assumptions of the bid-rent model, what should this professor be willing to pay in rent per month to live near campus if her hourly wage rate is $25? (In your calculations, assume there are 4 weeks in a given month.)

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A) $1200 B) $1500 C) $2100 D) $2700

34) Based on the following information, determine the location quotient for Amusement City and whether this city has a competitive advantage in the amusement industry: Employment in Amusements and Recreation in Amusement City: 54,446 Total Employment in Amusement City: 578,477 Employment in Amusements and Recreation (nationally): 1,381,377 Total Employment (nationally): 106,201,232.

A) 0.14; No, the city does not have a competitive advantage in this industry.

B) 7.24; No, the city does not have a competitive advantage in the industry C) 0.14; Yes, the city has a competitive advantage in this industry D) 7.24; Yes, the city has a competitive advantage in this industry

35) Using the following information, determine the location quotient for Springfield: Employment in Aerospace Products within Springfield: 30,044 Total Employment in Springfield: 208,054 Employment in Aerospace Products (nationally): 474,905 Total Employment (nationally): 106,201,232 A) 0.03 B) 12.10 C) 15.70 D) 32.29

36) A recent college graduate has obtained employment at a major financial institution in the big city. Since she just graduated, she has decided to continue to rent her college apartment in the suburbs and make the daily commute to the big city for work. She currently pays $1000 per month to rent an apartment in the suburbs. She works at the bank 5 days a week and it takes her 1 hour to commute from her home to her office. According to the assumptions of the bid-rent model, what should this recent grad be willing to pay in rent per month to live in the big city if her hourly wage rate is $20? (In your calculations, assume there are 4 weeks in a given month.)

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A) $800 B) $1000 C) $1400 D) $1800

37) Based on the following information, determine the location quotient for Music City and whether this city has a competitive advantage in the entertainment industry: Employment in Entertainment in Music City: 3,020 Total Employment in Music City: 656,785 Employment in Entertainment (nationally): 2,160,970 Total Employment (nationally): 106,201,232.

A) 0.23; No, the city does not have a competitive advantage in this industry.

B) 4.43; No, the city does not have a competitive advantage in the industry C) 0.23; Yes, the city has a competitive advantage in this industry D) 4.43; Yes, the city has a competitive advantage in this industry

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

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27) B 28) A 29) A 30) B 31) D 32) C 33) D 34) D 35) D 36) D 37) A Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) Real estate market research is an important process used by analysts to facilitate a better understanding of a property’s future profit potential. All of the following statements regarding market research are true EXCEPT: A) Real estate market research should always be flexible since the research depends directly on the problem at hand.

B) Market research consists of a series of facts that fails to consider the role of investor behavior in the decision-making process.

C) Most important data for a given market study often is not publicly available.

D) Market research should focus specifically on market segments for the property involved, rather than on the aggregate real estate market.

2) There are several key factors that can impact the value of an urban property. Community characteristics such as household income level and makeup are an example of which of the following value-determining factors?

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A) locational B) nonlocational C) land uses D) linkages

3) A popular adage in real estate is that property value is all about “location, location, location.” However, for most property types in nonresidential realms, nonlocational requirements are equally or even more important. All of the following are examples of nonlocational factors EXCEPT: A) floor plate size.

B) amount of parking.

C) nature of current tenants.

D) proximity to modes of public transportation.

4) Preferences of households can vary with time, prosperity, and context. The nuances in the preferences or needs of market subgroups are commonly referred to as: A) market segmentation.

B) market parameters.

C) market projection.

D) market cycles.

5) Key numbers that characterize the current condition and trends in a specific real estate market are more commonly referred to as market: A) segments.

B) parameters.

C) applications.

D) collections.

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6) Professor James Graaskamp often asserted that when one buys real estate, what one is buying is a set of assumptions about the future. Therefore, it is not surprising that the beginning point of the market research process is to: A) collect relevant data to examine the market and test initial definitions.

B) evaluate the results of market analysis.

C) construct a market-defining “story”.

D) refine market definitions and collect additional data.

7) In constructing a market-defining “story,” it is helpful to answer a series of fundamental questions around which analysis can be built. Which of the following questions is designed to identify the target market?

A) What is the real estate product under consideration?

B) Who are the customers?

C) What aspects of the product do the customers care about?

D) Who are the competitors?

8) In constructing a market-defining “story,” which of the following questions is designed to identify the market area?

A) What is the real estate product under consideration?

B) Who are the customers?

C) What aspects of the product do the customers care about?

D) Where are the customers?

9) In the initial round of market analysis, analysts will attempt to provide key numbers that characterize the current condition and trend in the market. For rental retail space, the key market parameters in question would most likely include all of the following EXCEPT: A) projected occupancy growth.

B) projected rental rate growth.

C) current vacancy levels.

D) projected property sales rates.

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10) In contrast to conventional market analysis, the “story” approach to market research starts with an analysis of: A) conditions in global real estate markets.

B) conditions in national real estate markets.

C) conditions in state real estate markets.

D) conditions in the property specific market.

11) A planned unit development (PUD) is a residential development that differs from traditional residential subdivisions in all of the following ways EXCEPT: A) it encompasses a blend of detached single family, attached single family, townhouses and apartments.

B) it typically has larger individual lots with extensive side-yards on the property.

C) it typically includes a variety of common areas.

D) it typically includes a variety of recreational facilities.

12) In the Elysian Forest example, the planned unit development was destined to be an unsuccessful venture from its inception because: A) there was a comparable project in the community that was successful.

B) the site and location of the project was atypical of the area as there were significant disadvantages in terms of location and visual appeal.

C) the target market was a nontraditional segment that relied heavily on a small portion of the local University City population.

D) University City was a big, high density city that could not support such development.

13) In the Palm Grove Office Complex example, the project was destined to be an ill-fated venture from its inception for all of the following reasons EXCEPT:

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A) the zoning laws of University City ultimately prevented the project’s developers from starting the construction process.

B) University City was not well-suited for large office space geared toward firms with greater than 25 employees.

C) Palm Grove Office Complex lacked the visual exposure, convenient access, and parking that its competitors held significant comparative advantages in.

D) the structures were primarily designed as general-purpose office space, which excluded potential occupants such as laboratories or medical offices.

14) Since most data for a given market study is not readily available, analysts must be creative in their use of data that they are able to obtain. The primary source for detailed household demographic information is: A) the U.S. Bureau of the Census.

B) the Federal Reserve.

C) the local tax collector’s office.

D) not available publicly.

15) In collecting data for nonresidential property analysis, it is helpful to understand the business community that currently exists in the specific area in question. A preliminary approach for ascertaining the number of firms by size, industry, and location is to obtain data from: A) the Bureau of Labor Statistics.

B) the National Transportation Service.

C) the U.S. Bureau of the Census: County Business Patterns.

D) the Federal Reserve.

16) A new residential development will face competition from other new developments, other builders, and sales of existing homes. To determine if demand in that market segment will be sufficient to justify proceeding with the project, a developer would be most interested in estimating a:

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A) capture rate.

B) capitalization rate.

C) risk-free rate.

D) risk premium.

17) The amplitude of real estate cycles can vary significantly across property types. In considering cycles in vacancy rates, which of the following property types historically exhibits the least volatility in its cycle (i.e., the lowest amplitude of peaks and troughs throughout the cycle)?

A) apartment B) office C) retail D) hotel

18) The presence of real estate cycles presents a major challenge when forecasting real estate market parameters. If the market value of a residential developer’s project exceeds its construction costs, an increase in the supply of units will occur. As the market becomes oversupplied, we would expect which of the following to occur?

A) an increase in occupancy rates B) an increase in market values C) a decrease in real rental rates D) a decrease in construction costs

19) If the market value of a residential developer’s project falls below its construction costs, builders cease to build. With supply thus curtailed, we would expect which of the following to occur?

A) a decrease in occupancy rates B) a decrease in market values C) an increase in real rental rates D) an increase in construction costs

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20) Development of subdivisions, apartments, offices, or other commercial structures can have a lead time of two years or more. In general, the longer the construction lead time: A) the lower the construction cost.

B) the greater the supply of units.

C) the lower the market value.

D) the greater the amplitude of real estate cycles.

21) Computer software systems that enable one to manipulate and “map” information with great flexibility and speed are referred to as: A) geographical information systems (GIS).

B) psychographics.

C) survey research.

D) census mapping.

22) A tool used by real estate analysts to relate a consumer’s activities, interests, opinions, and values to a consumer’s demographics is referred to as: A) geographical information systems (GIS).

B) psychographics.

C) survey research.

D) census mapping.

23) Survey research has been applied to real estate markets at many levels. Despite its frequent application, analysts must be cautious with survey use because: A) it is difficult to implement.

B) interviews and questionnaires are not received well by consumers.

C) it cannot be used in a small sample area.

D) it can be fraught with abortive errors.

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24) While predicting real estate cycles is difficult, a key indicator used to evaluate where a property is within the cycle is: A) the level of household income.

B) the form of land use.

C) the size of the property.

D) the number of building permits issued.

25) Since most data that we would like to conduct a thorough market analysis is unavailable, a researcher will find it useful to find a data series that will closely represent the variable of interest. We typically refer to this type of variable as a: A) relevant.

B) proxy.

C) correlation.

D) cluster.

26) When selecting a proxy variable to represent market data that is not readily available, researchers should select a data series that is highly __________ with the variable of interest.

A) correlated B) clustered C) irrelevant D) segmented

27) When you are evaluating the prospects for a project that is new in your setting and therefore has no actual relevant market performance data, it is most helpful to use which of the following techniques as the basis for your analysis?

A) analogy B) fabrication C) cooperation D) recommendation

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28) Suppose that you were interested in building a luxury apartment complex in your hometown. In your analysis of local demographics, you discover that the target market makes up only 5% (core market share) of the households that currently rent (or would be interested in renting) in this town. If market experts believe that a total of 5,000 apartment units will be rented in your entire hometown within the next year, what is the projected number of units the developer could expect to lease in year 1 if he is able to capture 20% of the market potential?

A) 1000 units B) 500 units C) 250 units D) 50 units

29) Suppose a developer is interested in building a new townhome community. Through his market research, the developer has determined that the target market makes up 10% (core market share) of the households that currently reside in the metropolitan area. If an analysis of data from the MLS indicates that there should be approximately 500 residential sales in this area over the next year, what is the projected number of units the developer could expect to sell in year 1 if he is able to capture 50% of the market potential?

A) 500 units B) 250 units C) 50 units D) 25 units

30) Suppose a developer is interested in building a new residential subdivision. Through his market research, the developer has determined that the target market segment potential in year 1 consists of 160 households. If the developer projects that he will be able to sell 24 homes in the first year, what is his assumed capture rate?

A) 6.67% B) 15% C) 24% D) 85%

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31) Suppose a developer is interested in building a new apartment community. Through her market research, the developer has determined that the target market segment potential in year 1 consists of 100 households. The developer believes that the target market segment potential will grow by 5% annually over the next five years. If the developer projects a capture rate of 25% for each of the next five years, how many units does she plan on selling by the end of year 5?

A) 25 units B) 125 units C) 138 units D) 175 units

32) Suppose that you have begun to gather some demographic data in order to project the potential sales of a new development project. The developer hopes to be able to target the following household types who fall in the upper 10% of income brackets: Empty Nesters, Single Parents, and Unrelated Individuals. Utilizing the following population information, determine the core market share that the development project yearns to target with this project: Total Owner Occupant Households: 48,000 Traditional Families in the Upper 10% of Income Brackets: 25,000 Empty Nesters in the Upper 10% of Income Brackets: 5,000 Single Parents in the Upper 10% of Income Brackets: 10,000 Unrelated Individuals in the Upper 10% of Income Brackets: 8,000 A) 4.17% B) 47.92% C) 52.08% D) 92.00%

33) A developer of a new planned unit development (PUD) has gathered the following market information for University City. The developer estimates that there will be 1,500 home (all types) sales in University City over the next year. If an analysis of demographic information has revealed that the core market share for the PUD project within the community is 14.0%, what is the total market segment potential for this project?

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A) 42 units B) 105 units C) 210 units D) 1290 units

34) A developer of a new townhome community has gathered the following market information for University City. The developer estimates that there will be 1,200 home (all types) sales in University City over the next year. An analysis of demographic information has revealed that the core market share for the townhome project within the community is 10%.

Assuming a capture rate of 20%, what is the developer’s first year projection of townhome sales in the new community?

A) 24 units B) 120 units C) 240 units D) 600 units

35) Suppose a developer is interested in building a new apartment community. Through her market research, the developer has determined that the target market segment potential in year 1 consists of 100 households. The developer believes that the target market segment potential will grow by 5% annually over the next five years. If the developer projects a capture rate of 25% for each of the next five years, but is only to sell 26 apartment units in each of the next five years, in which year will her actual sales first fail to meet her projected sales numbers?

A) Year 2 B) Year 3 C) Year 4 D) Year 5

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36) Suppose that you were interested in building a new townhome community on the east side of University City that will be marketed exclusively to senior citizens above the age of 62.

In your analysis of local demographics, you discover that the target market makes up only 10% (core market share) of the households that currently live in this city. If market experts believe that a total of 500 townhome (or similar condominium) units will be purchased in all of University City within the next year, what is the projected number of units the developer could expect to sell in year 1 if he is able to capture 40% of the market potential?

A) 500 units B) 50 units C) 20 units D) 10 units

37) Suppose a developer is interested in building a new subdivision of single-family homes.

Through her market research, the developer has determined that the target market segment potential in year 1 consists of 176 households. If the developer projects that she will be able to sell 44 homes in the first year, what is her assumed capture rate?

A) 15% B) 25% C) 44% D) 75%

38) Suppose that you have begun to gather some demographic data in order to project the potential sales of a new development project. The developer hopes to be able to target the following household types who fall in the age 55 and up housing market: Seniors - Employed Part Time; Seniors – Retired / Not in Assisted Living. Utilizing the following population information, determine the core market share that the development project yearns to target with this project.

Total Senior Households: 25,000 Seniors - Employed Full Time: 8,000 Seniors - Employed Part Time: 2,500 Seniors – Retired / Not in Assisted Living: 12,000 Seniors – Retired / In Assisted Living: 2,500

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A) 58.0% B) 80.0% C) 90.0% D) 100.0%

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

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27) A 28) D 29) D 30) B 31) C 32) B 33) C 34) A 35) B 36) C 37) B 38) A Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) Estimating the market value of real estate is complicated by the unique characteristics of real estate markets. In contrast to stock markets, real estate markets are characterized by all of the following EXCEPT: A) no two assets are considered perfect substitutes for one another.

B) market prices are revealed almost instantaneously to prospective buyers.

C) transactions occur infrequently.

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

2) Real estate appraisers generally distinguish among the concepts of market value, investment value, and transaction value. Which of the following statements best describes the concept of market value?

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A) It is an estimate of the most probable selling price of a property in a competitive market.

B) It is the value a particular investor places on a property.

C) It is the price we observe when a property is sold.

D) It is the maximum amount that a seller would be willing to accept.

3) The value a particular investor places on a property is more commonly referred to as the property’s: A) book value.

B) market value.

C) investment value.

D) transaction value.

4) The price we observe when a property is sold is more commonly referred to as the property’s: A) book value.

B) indicated value.

C) appraised value.

D) transaction value.

5) In real estate markets, a transaction occurs only when the investment value of the buyer exceeds the investment value of the seller. The buyer’s investment value is the ________ that he or she would be willing to pay for a particular property, while the seller’s investment value is the _______ that he or she would be willing to accept.

A) minimum; minimum B) minimum; maximum C) maximum; minimum D) maximum; maximum

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6) While it is often sufficient to rely on informal methods of estimating the market value of real estate assets, the complexity and large dollar value of many real estate decisions dictate that formal estimates based on methodical collection and analysis of relevant market data should be utilized. The unbiased written estimate of the market value of a property is commonly referred to as a(n): A) arm’s length transaction.

B) appraisal.

C) property adjustment.

D) reconciliation.

7) Real estate professionals have long supported strict standards of ethics and practice.

Followed by all states and federal regulatory agencies, which of the following imposes ethical obligations and minimum standards that must be followed by all real estate professionals providing formal estimates of market value?

A) Uniform Standards of Professional Appraisal Practice (USPAP) B) Multiple Listing Services (MLS) C) Department of Housing and Urban Development (HUD) D) Office of Federal Housing Enterprise Oversight (OFHEO)

8) As part of the data analysis step in the appraisal process, it is necessary to consider the highest and best use of the property in question. In regards to determining highest and best use, all of the following statements are true EXCEPT: A) The proposed property use must be legally permissible.

B) It must be physically possible for the property to be used in the manner specified.

C) No financial limits are considered when determining the property’s best use.

D) The property use must provide the greatest benefit to the owner.

9) Which of the following approaches for calculating the market value of a property involves estimating the dollar value associated with replacing the property new, as well as determining the loss in value due to physical, functional, and external obsolescence?

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A) income approach B) sales comparison approach C) cost approach D) investment approach

10) Which of the following approaches for calculating the market value of a property involves the projection of the property’s future expected cash flows?

A) income approach B) sales comparison approach C) cost approach D) investment approach

11) While there are several conventional approaches used to estimate the market value of real estate, which of the following is typically considered the most reliable approach?

A) income approach B) sales comparison approach C) cost approach D) investment approach

12) It may be appropriate for a real estate professional to utilize different approaches for estimating the market value of a property depending upon the particular property type and use.

Which of the following approaches would be most applicable when considering the valuation of retail office space (i.e., which approach would receive the most weight in the valuation process)?

A) income approach B) sales comparison approach C) cost approach D) investment approach

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13) If all appraisal methods are appropriate for use in valuing a particular property, there is a clear order of preference that real estate professionals adhere to. Which of the following depicts the preferred order, with the most preferable approach being listed first and the least preferable listed last?

A) sales comparison approach, cost approach, income approach B) income approach, Sales comparison approach, cost approach C) cost approach, income approach, sales comparison approach D) sales comparison approach, income approach, cost approach

14) Several techniques can be used to obtain an indication of land value. The cost approach to valuation would most likely be used for which of the following properties?

A) one-family residential property B) retail office space C) education facility D) high-rise apartments

15) The process in which an appraiser weighs the relative reliability of value indicators for the property being valued is more commonly referred to as: A) depreciation.

B) deterioration.

C) reproduction.

D) reconciliation.

16) Most appraisers would say that report writing is one of the most important functions that they perform. Assume that an appraiser is putting together a report for a single family home.

Which of the following reporting options would be the most commonly used in this scenario?

A) self-contained appraisal report B) summary appraisal report C) restricted appraisal report D) oral appraisal report

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17) Real estate appraisal is often considered “more art than science,” since identifying truly comparable properties is a subjective process. Therefore, it is essential that a comparable property transaction at least meets the requirement that it was fairly negotiated under typical market conditions. Which of the following types of transactions would be most appropriate for use in the sales comparison approach to valuation?

A) commingled business transactions B) low-interest financing programs C) real estate auctions D) arm’s-length transactions

18) While there is no specific number of comparables that is required for every appraisal assignment, how many comparable sales are considered adequate as long as the properties are very similar to the subject property?

A) one B) three C) five D) ten

19) When employing the sales comparison approach, appraisers must consider numerous adjustments to convert each comparable sale transaction into an approximation of the subject property. Adjustments are divided into two groups: transactional adjustments and property adjustments. All of the following are transactional adjustments EXCEPT: A) financing terms.

B) market conditions.

C) conditions of sale.

D) location.

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20) Favorable mortgage financing may have a significant impact on the transaction price of the particular property. If the comparable property was known to have had favorable financing terms negotiated into the transaction price, which of the following adjustments should take place? (Note: Assume that the comparable property cannot be dropped from the analysis as there are already limited comparable sales transactions.)

A) The transaction price of the comparable property should be adjusted downward.

B) The transaction price of the comparable property should be adjusted upward.

C) The transaction price of the subject property should be adjusted downward.

D) The transaction price of the subject property should be adjusted upward.

21) Adjustments for physical characteristics are intended to capture the dimensions in which a comparable property differs physically from the subject property. If the only physical difference between the subject property and the comparable is that the comparable does not have a fireplace, which of the following adjustments should take place?

A) The transaction price of the comparable property should be adjusted downward.

B) The transaction price of the comparable property should be adjusted upward.

C) The transaction price of the subject property should be adjusted downward.

D) The transaction price of the subject property should be adjusted upward.

22) The sequence of adjustments to the transaction price of a comparable property would make no difference if all adjustments were dollar adjustments. However, if percentage adjustments are involved then the sequence does matter. In making adjustments to a comparable property to arrive at a final adjusted sales price, the proper sequence for the following adjustments would be: A) financing terms, market conditions, location.

B) location, market conditions, financing terms.

C) market conditions, location, financing terms.

D) location, financing terms, market conditions.

23) The cost approach to valuation assumes the market value of a new building is similar to the cost of constructing it today. Which of the following terms refers to the expenditure required to construct a building of equal utility using modern construction techniques, materials, and design that eliminates outdated aspects of the structure?

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A) reproduction cost B) replacement cost C) fixed cost D) variable cost

24) Accrued depreciation is the difference between the current market value of a building and the total cost to reproduce it new. One reason for this difference is related to changes in tastes, preferences, technical innovations, or market standards. This is commonly referred to as: A) physical deterioration.

B) functional obsolescence.

C) external obsolescence.

D) tax depreciation.

25)

Which of the following would be categorized as a cause of external obsolescence?

A) lack of adequate insulation B) deterioration of indoor carpets C) increased traffic flow due to more intensive use in the local area D) outdated fixtures

26) At the conclusion of the traditional sales comparison approach to valuation, the appraiser evaluates and reconciles the final adjusted sale prices into a single value for the subject property.

This single value is commonly referred to as: A) indicated value.

B) investment value.

C) transaction value.

D) replacement value.

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27) In using transaction data to determine the current value of the subject property, it is important to recognize that general market conditions may have changed since a particular transaction occurred. Property A sold 18 months ago for $235,000 and Property B sold 12 months ago for $215,000. If the two properties are priced today at $239,500 and $222,300, respectively, what is the average monthly rate of increase that can be used to adjust comparable prices for changes in market conditions?

A) 0.09% B) 0.17% C) 0.19% D) 0.32%

28) A comparable property sold 15 months ago for $105,000. If the appropriate adjustment for market conditions is 0.25% per month (without compounding), what would be the adjusted price of the comparable property?

A) $105,262.50 B) $105,393.80 C) $108,937.50 D) $144,375

29) Given the following information, determine the value of having an additional bathroom.

Assume that the comparable properties are similar in all other attributes besides those listed in the table below.

Time Sold Bathrooms Size Sale Price

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Comparable 2

Comparable 3

Comparable 4

Today 1 3500 sq. ft $150,000

1 Year Ago 1 3000 sq. ft. $140,000

Today 2 3500 sq. ft $160,000

Today 2 3000 sq. ft. $156,000

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A) $4,000 B) $6,000 C) $10,000 D) $16,000

30) Given the following information, determine the value of having an additional bedroom.

Assume that the comparable properties are similar in all other attributes besides those listed in the table below.

Time Sold Bathrooms Bedrooms Sale Price

Comparable 1

Comparable 2

Comparable 3

Comparable 4

Today 2 4 $250,000

1 Year Ago 2 5 $265,000

Today 2 5 $275,000

1 Year Ago 3 5 $270,000

A) $5,000 B) $15,000 C) $20,000 D) $25,000

31) Suppose that we observe two comparable properties that have each sold twice within the past two years. Property A sold 24 months ago for $350,000 and Property B sold 18 months ago for $325,000. If the two properties were sold today at $375,000 and $340,000, respectively, estimate the change in market conditions (percentage change in price) per month, assuming we equally weight the two properties in our analysis?

A) 0.19% B) 0.24% C) 0.28% D) 0.33%

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32) Suppose that an appraiser has just completed her analysis using the cost approach to valuation. She has determined that the market value of the subject property is $400,000. If the added value of the site was $80,000 and accrued depreciation amounted to $50,000, what was the reproduction cost of the building?

A) $270,000 B) $370,000 C) $430,000 D) $530,000

33) Assume you have been hired to appraise a local hospital. Your best estimate of the reproduction (or replacement) cost of the building is $3,700,000. However, upon evaluating the use of land in the local area, you have deemed the value of the site to be worth an additional $800,000. If the building has depreciated by $500,000 over its lifetime and there are no further depreciation losses due to external or functional obsolescence, what is the indicated value of the hospital using the cost approach?

A) $2,400,000 B) $3,700,000 C) $4,000,000 D) $4,500,000

34) Let’s assume that we are about to appraise a house using the cost approach. The home was originally constructed in the early 1900s and is one of the last of its kind in this area. The cost of constructing an exact replica of this residence is estimated to be $350,000. On our trip to the actual property, we notice that this is the only residential unit located on this particular road.

Based on the current usage of adjacent real estate, we estimate that the property would be worth an additional $25,000 in its highest and best use. However, due to the dramatic shift in the perceived safety of the neighborhood, values of any remaining residential properties in the area have fallen by $20,000. Due to the home’s age, we also notice that there has been a significant amount of physical deterioration to the building, amounting to an estimate of $50,000 in lost value. Since the home was built over 100 years ago, the floor plan is quite obsolete relative to current preferences. This has a detrimental effect on the value of the property that is estimated to be approximately $15,000. Given this information, determine the appraised value of the home using the cost approach.

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A) $265,000 B) $290,000 C) $350,000 D) $460,000

35) Suppose that an appraiser has come to the following conclusions in evaluating the subject property. Due to the dramatic shift in the perceived safety of the neighborhood, values of any residential properties in the area of the subject property have fallen by $10,000, on average. Due to the subject property’s age, physical deterioration to the building accounts for an estimate of $50,000 in lost value. An evaluation of the floor plan reveals that it is quite obsolete relative to current homebuyer preferences. This has a detrimental effect on the value of the property that is estimated to be approximately $15,000. Based on your understanding of adjustments related to accrued depreciation, which of the following pertains to the adjustment for external obsolescence?

A) $10,000 B) $15,000 C) $50,000 D) $75,000

36) A comparable property sold 4 months ago for $287,000. If the appropriate adjustment for market conditions is -0.50% per month (without compounding), what would be the adjusted price of the comparable property assuming all else is the same between the two properties?

A) $269,780.00 B) $281,260.00 C) $285,565.00 D) $292,740.00

37) Given the following information, determine the value of having an additional 500 square feet of living space. Assume that the comparable properties are similar in all other attributes besides those listed in the table below.

Time Sold

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Comparable 1

Comparable 2

Comparable 3

Comparable 4

Today

Today

1 Year Ago

Today

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Bathrooms Size Sale Price

1 3500 sq. ft $150,000

1 3000 sq. ft. $140,000

2 3500 sq. ft $160,000

2 3000 sq. ft. $156,000

A) $4,000 B) $6,000 C) $10,000 D) $16,000

38) Given the following information, determine the value of having an additional bedroom.

Assume that the comparable properties are similar in all other attributes besides those listed in the table below.

Time Sold Bathrooms Bedrooms Sale Price

Comparable 1

Comparable 2

Comparable 3

Comparable 4

Today 2 3 $375,000

1 Year Ago 2 3 $365,000

Today 2 4 $380,000

1 Year Ago 3 3 $367,500

A) $2,500 B) $5,000 C) $7,500 D) $10,000

39) Suppose that we observe two comparable properties that have each sold twice within the past four years. Property A sold 24 months ago for $500,000 and Property B sold 48 months ago for $575,000. If the two properties were sold today at $425,000 and $465,000, respectively, estimate the change in market conditions (percentage change in price) per month, assuming we equally weight the two properties in our analysis?

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A) −0.56% B) −0.51% C) 0.61% D) 0.68%

40) Suppose that an appraiser has just completed her analysis using the cost approach to valuation. She has determined that the reproduction cost of the subject property is $370,000. If the added value of the site was $80,000 and accrued depreciation amounted to $50,000, what was the estimated value of the building using the cost approach?

A) $320,000 B) $370,000 C) $400,000 D) $500,000

41) Given the following information, what adjustment would need to be made to account for the lot size difference between the Subject Property and Comparable Property?

Adjustments Market Conditions Lot Size Effective Age (Years) Living Area (Sq. Ft) Bath Bedrooms

Time Sold Lot Size (Acres) Effective Age (Years) Living Area (Sq. Ft) Bath Bedrooms Sale Price

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−0.50% (per month) $25,000 (per acre) $1,000 (per year) $45.00 (per sq. ft.) $1,250 (per bath) $3,000 (per bedroom)

Subject Property

Comparable Property

Today 0.83 8 2,197 3.5 4 -

4 Months Ago 0.80 7 2,383 3.5 4 $287,000

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A) The price of the subject property must be adjusted upward by $750.

B) The price of the subject property must be adjusted downward by $750.

C) The price of the comparable property must be adjusted upward by $750.

D) The price of the comparable property must be adjusted downward by $750.

42) Given the following information, what adjustment would need to be made to account for the living area difference between the Subject Property and Comparable Property?

Adjustments Market Conditions Lot Size Effective Age (Years) Living Area (Sq. Ft) Bath Bedrooms

Time Sold Lot Size (Acres) Effective Age (Years) Living Area (Sq. Ft) Bath Bedrooms Sale Price

−0.50% (per month) $25,000 (per acre) $1,000 (per year) $45.00 (per sq. ft.) $1,250 (per bath) $3,000 (per bedroom)

Subject Property

Comparable Property

Today 0.83 8 2,197 3.5 4 -

4 Months Ago 0.80 7 2,383 3.5 4 $287,000

A) The price of the subject property must be adjusted upward by $8,370.

B) The price of the subject property must be adjusted downward by $8,370.

C) The price of the comparable property must be adjusted upward by $8,370.

D) The price of the comparable property must be adjusted downward by $8,370.

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43) Given the following information, determine the final appraisal value of the subject property.

Adjustments Market Conditions Lot Size Effective Age (Years) Living Area (Sq. Ft) Bath Bedrooms

Time Sold Lot Size (Acres) Effective Age (Years) Living Area (Sq. Ft) Bath Bedrooms Sale Price

−0.50% (per month) $25,000 (per acre) $1,000 (per year) $45.00 (per sq. ft.) $1,250 (per bath) $3,000 (per bedroom)

Subject Property

Comparable Property

Today 0.83 8 2,197 3.5 4 -

4 Months Ago 0.80 7 2,383 3.5 4 $287,000

A) $271,140 B) $272,640 C) $284,120 D) $289,380

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

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27) C 28) C 29) C 30) D 31) C 32) B 33) C 34) B 35) A 36) B 37) C 38) B 39) B 40) C 41) C 42) D 43) B Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) Which of the following measures is considered the fundamental determinate of market value for income-producing properties?

A) net operating income B) potential gross income C) operating expenses D) capital expenditures

2) Net operating income is similar to which of the following measures of cash flow in corporate finance?

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A) dividend yield B) earnings before deductions for interest, depreciation, income taxes, and amortization (EBIDTA) C) price-earnings ratio D) discount rate

3) The process of converting periodic income into a value estimate is referred to as income capitalization. Income capitalization models can generally be categorized as either direct capitalization models or discounted cash flow models. Which of the following statements best describes the direct capitalization method?

A) Value estimates are based on a multiple of expected first year net operating income.

B) Appraisers must make explicit forecasts of the property’s net operating income for each year of the expected holding period.

C) Appraisers must select the appropriate yield at which to discount future cash flows.

D) The forecast must include the net income produced by a sale of the property at the end of the expected holding period.

4) The starting point in calculating net operating income is the total annual income the property would produce assuming 100 percent occupancy and no collection losses. This is commonly referred to as: A) effective Gross Income.

B) potential Gross Income.

C) operating expenses.

D) capital expenditures.

5) The rental income that a property would most probably command if all the space were continuously leased at current rental rates is more commonly referred to as the: A) market rent.

B) historic rent.

C) contract rent.

D) net rent.

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6) The actual rental income being paid in accordance with a legally binding commitment is more commonly referred to as the: A) market rent.

B) historic rent.

C) contract rent.

D) potential rent.

7) The distinction between market rent and contract rent is important due to differences in lease terms. Office, retail, and industrial tenants most commonly occupy their space under leases that run: A) one year or less.

B) one to three years.

C) three to five years.

D) ten years or more.

8) One complication that appraisers may face is the variety of lease types that may be available for a particular property type. Which of the following statements best describes a “graduated” or step-up lease?

A) The monthly rent remains fixed over the entire lease term.

B) The lease establishes schedule of rental rate increases over the term of the lease.

C) Rental rate increases are indexed to the general rate of inflation.

D) Rental rates are a function of the sales of the tenant’s business.

9) The proportion of potential gross income not collected, even when supply equals demand in the rental market, is more commonly referred to as the: A) natural vacancy rate.

B) absorption vacancy rate.

C) turnover vacancy rate.

D) historical vacancy rate.

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10) In calculating net operating income, vacancy losses must be subtracted from the gross income collected. The normal range for vacancy and collection losses for apartment, office, and retail properties is: A) between zero and one percent.

B) between one and five percent.

C) between five and fifteen percent.

D) between fifteen and twenty percent.

11) The expected costs to make replacements, alterations, or improvements to a building that materially prolong its life and increase its value is referred to as: A) operating expenses.

B) capital expenditures.

C) vacancy losses.

D) collection losses.

12) The ordinary and necessary expenditures owners expect to incur during the next 12 months that do not materially add value, but keep the property competitive in its local rental market are more commonly referred to as: A) operating expenses.

B) capital expenditures.

C) vacancy losses.

D) collection losses.

13) Operating expenses can be divided into two categories: variable and fixed expenses.

Which of the following best exemplifies a fixed expense?

A) utilities B) property management C) local property taxes D) trash removal

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14) Which of these is most likely to be regarded as a capital expenditure rather than an operating expense?

A) property taxes B) trash removal C) insurance payments D) roof replacement

15) Most appraisers adhere to an “above-line” treatment of capital expenditures. This implies which of the following?

A) Capital expenditures are subtracted in the calculation of net operating income.

B) Capital expenditures are subtracted from net operating income to obtain a net cash flow measure.

C) Capital expenditures are added to net operating income.

D) Capital expenditures are excluded from all calculations because they are difficult to estimate.

16) Appraisers rely on recently completed transactions of similar properties to guide their selection of the cap rate to be used to value a single property. The method of estimating a cap rate from a series of comparable properties is more commonly referred to as: A) indirect capitalization.

B) direct market extraction.

C) overall capitalization.

D) terminal capitalization.

17) The going-in cap rate, or overall capitalization rate, is a measure of the relationship between a property’s current income stream and its price or value. Which of the following statements regarding cap rates is true?

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A) It is a measure of total return since it accounts for future cash flows from operations and expected appreciation (depreciation) in the market value of the property.

B) It is a discount rate that can be applied to future cash flows.

C) It is analogous to the dividend yield on a common stock.

D) It is the projected rate at which prices will appreciate in the future.

18) For smaller income-producing properties, appraisers may use the ratio of a property’s selling price to its effective gross income. This is an example of a: A) net operating income.

B) going-out cap rate.

C) going-in cap rate.

D) gross income multiplier.

19) Gross income multiplier analysis assumes that the subject and comparable properties are collecting market rents. Therefore, it is frequently argued that an income multiplier approach to valuation is most appropriate for properties with short-term leases. Which of the following property types, therefore, would we find it most appealing to use a gross-income multiplier in our analysis?

A) apartments B) office C) industrial D) retail

20) When using discounted cash flow analysis for valuation, the appraiser must estimate the sale price at the end of the expected holding period. This price (assuming selling expenses have yet to be accounted for) is referred to as the property’s: A) net sale proceeds.

B) selling expenses.

C) terminal value.

D) current market value.

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21) When using discounted cash flow analysis for valuation, an appraiser will prepare a cash flow forecast, often referred to as a: A) restricted appraisal report.

B) net operating income statement.

C) direct market extraction.

D) pro forma.

22) When calculating the net operating income of a property, it is important to identify any expenses that will be incurred in attempts to maintain the property. All of the following would be considered operating expenses EXCEPT: A) property taxes.

B) property insurance premiums.

C) mortgage payments.

D) utility expenses.

23) The cap rate is an important metric that investors use to analyze the state of commercial real estate markets. When interpreting cap rate movements, an increase in cap rates over time would indicate that: A) the discount rate used in TVM (time value of money) calculations has increased.

B) the discount rate used in TVM (time value of money) calculations has decreased.

C) property values have increased.

D) property values have decreased.

24) Given the following information, calculate the overall capitalization rate.

Sale price: $950,000 Potential Gross Income: $250,000 Vacancy and Collection Losses: $50,000 Operating Expenses: $50,000

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A) 15.8% B) 21.1% C) 26.3% D) 36.8%

25) Given the following information, calculate the net operating income assuming below-line treatment of capital expenditures.

Property: 4 office units Contract Rents per unit: $2500 per month Vacancy and collection losses: 15% Operating Expenses: $42,000 Capital Expenditures: 10% A) $48,000 B) $60,000 C) $95,000 D) $102,000

26) Given the following information, calculate the effective gross income.

Property: 4 office units Contract rents per unit: $2500 per month Vacancy and collection losses: 15% Operating Expenses: $42,000 Capital Expenditures: 10% A) $100,000 B) $102,000 C) $120,000 D) $135,000

27) Given the following information, calculate the effective gross income multiplier.

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A) 0.36 B) 0.30 C) 2.8 D) 3.6

28) Given the following information, calculate the appropriate going-in cap rate using mortgage-equity rate analysis.

Mortgage financing = 75% Typical debt financing cap rate: 10% Sale price: $1,950,000 Before Tax Cash Flow (BTCF): $390,000 A) 9.6% B) 10% C) 12.5% D) 13.6%

29) Given the following information, calculate the appropriate going-in cap rate using general constant-growth formula.

Overall market discount rate = 12% Constant growth rate projection: 3% per year Sale price: $1,950,000 Net operating income: $390,000 Potential gross income: $520,000 A) 8% B) 9% C) 10% D) 11.5%

30) Given the following information, calculate the effective gross income multiplier.

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A) 0.136 B) 7.35 C) 10.42 D) 12.25

31) Three highly similar and competitive income-producing properties within two blocks of the subject property have sold this month. All three offer essentially the same amenities and services as the subject property. The sale prices and estimated first-year NOI for each of the comparable properties are as follows: Comparable A B C

Sale Price $500,000 $420,000 $475,000

NOI1 $55,000 $50,400 $53,400

Using the information provided, calculate the overall capitalization rate by direct market extraction assuming each property is equally comparable to the subject.

A) 11.0% B) 11.2% C) 11.4% D) 12.0%

32) Suppose that you are attempting to value an income producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 11.44%. If the projected first year net operating income (NOI) for the subject property is $44,500, what is the indicated value of the subject using direct capitalization?

A) $49,590.80 B) $50,225.73 C) $388,986.00 D) $509,080.00

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33) Suppose that an income producing property is expected to yield cash flows for the owner of $10,000 in each of the next five years, with cash flows being received at the end of each period. If the opportunity cost of investment is 12% annually and the property can be sold for $100,000 at the end of the fifth year, determine the value of the property today.

A) $36,047.76 B) $56,742.69 C) $83,333.33 D) $92,790.45

34) Suppose that examination of a pro forma reveals that the fifth year net operating income (NOI) for an income producing property that you are analyzing is $138,446 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 5% per year, determine the projected sale price of the property at the end of year five if the going-out capitalization rate is 9%.

A) $988,900.00 B) $1,465,037.00 C) $1,538,289.00 D) $1,615,203.00

35) Analysis of a subject property’s pro forma reveals that its fifth year net operating income (NOI) is projected to be $100,282 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 3% per year and the going-out capitalization rate in year five to be 10%, determine the net sale proceeds the current owner of the property would receive if he were to sell the property at the end of year five and incur selling expenses that amounted to $58,300.

A) $944,520.00 B) $974,610.00 C) $1,002,820.00 D) $1,032,910.00

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36) Four highly similar and competitive income-producing properties located in close proximity to the subject property have sold this month. All four offer essentially the same amenities and services as the subject property. The sale prices and estimated first-year NOI for each of the comparable properties are as follows: Comparable A B C D

Sale Price $1,450,000 $1,100,000 $1,250,000 $1,500,000

NOI1 $155,000 $135,400 $143,400 $169,000

Using the information provided, calculate the overall capitalization rate by direct market extraction assuming each property is equally comparable to the subject.

A) 10.69% B) 11.02% C) 11.43% D) 12.52%

37) Using the following information, determine the net operating income (NOI) for the first year of operations of the subject property assuming “below-line” treatment of capital expenditures.

Subject Property Number of apartments Market Rent (per month) Vacancy and Collection Losses Operating Expenses Capital Expenditures

15 1000 10% of PGI 5% of EGI 10% of EGI

A) $135,000 B) $137,700 C) $153,900 D) $162,000

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38) Using the following information, determine the net operating income (NOI) for the first year of operations of the subject property using “above-line” treatment of capital expenditures.

Subject Property Number of apartments Market Rent (per month) Vacancy and Collection Losses Operating Expenses Capital Expenditures

15 1000 10% of PGI 5% of EGI 10% of EGI

A) $135,000 B) $137,700 C) $153,900 D) $162,000

39) Suppose that you are attempting to value an income producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 7.5%. If the projected first year net operating income (NOI) for the subject property is $135,500, what is the indicated value of the subject using direct capitalization?

A) $144,985.00 B) $150,555.56 C) $1,806,666.67 D) $9,033,333.33

40) Suppose that an income producing property is expected to yield cash flows for the owner of $150,000 in each of the next five years, with cash flows being received at the end of each period. If the opportunity cost of investment is 8% annually and the property can be sold for $1,250,000 at the end of the fifth year, determine the value of the property today.

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A) $304,704.00 B) $1,449,635.50 C) $1,481,143.98 D) $2,000,000.00

41) Suppose that examination of a pro forma reveals that the fifth year net operating income (NOI) for an income producing property that you are analyzing is $913,058 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 3% per year, determine the projected sale price of the property at the end of year five if the going-out capitalization rate is 8%.

A) $1,603,600 B) $2,350,159 C) $11,413,225 D) $11,755,622

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

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27) D 28) C 29) B 30) B 31) C 32) C 33) D 34) D 35) B 36) C 37) C 38) B 39) C 40) B 41) D Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) In a mortgage loan agreement, the financial rights and obligations of borrower and lender are detailed in the: A) mortgage (Deed of Trust).

B) listing contract.

C) note.

D) assignment of mortgage.

2) In a mortgage loan, the borrower always creates two documents: a note and a mortgage.

Which of the following pieces of information is provided in the mortgage?

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A) how the interest rate is to be computed B) whether the borrower has the right to prepay the principal during the term of the loan, and any prepayment penalties that would be incurred as a result C) whether the borrower is released from liability for fulfillment of the contract D) an unambiguous description of the property that is being pledged as collateral for the loan

3) A significant number of mortgage loans use adjustable interest rates, in which the interest rate of the loan is tied to an index rate that fluctuates over time. For income-producing property, the most common index rate is the: A) one-year U.S. Treasury constant maturity rate.

B) prime rate.

C) London Interbank Offered Rate (LIBOR).

D) cost-of-funds index.

4) The market determined interest rate that is the “moving part” in an adjustable rate mortgage is more commonly referred to as the: A) teaser rate.

B) margin.

C) index rate.

D) cap rate.

5) Added to the index of the adjustable rate is a margin, which is the lender’s “markup.” For standard Adjustable Rate Mortgage (ARM) loans, the typical industry margin is: A) 75 basis points.

B) 175 basis points.

C) 275 basis points.

D) 375 basis points.

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6) Most Adjustable Rate Mortgage (ARM) loans have been marketed with a temporarily reduced interest rate commonly referred to as a: A) rate cap.

B) teaser rate.

C) payment cap.

D) prepayment rate.

7) For most mortgage loans on commercial real estate, the right of prepayment is constrained through a prepayment penalty. Which of the following types of prepayment penalties requires a borrower to provide the lender with some combination of U.S. Treasury securities that will serve to replace the cash flows of the loan being paid off?

A) yield-maintenance prepayment penalties B) prepayment lockout C) defeasance prepayment penalty D) curtailment penalty

8) Because the mortgage conveys a complex claim for a long period of time, clauses are included in anticipation of possible future complications. Which of the following clauses requires a borrower to make monthly deposits into an account in order to pay obligations such as property taxes, community association fees, or causality insurance premiums?

A) demand clause B) insurance clause C) escrow clause D) exculpatory clause

9) Certain mortgage loans contain a due-on-sale clause, which gives the lender the right to terminate the loan at sale of the property. Which of the following types of loans is the most likely to contain a due-on-sale clause?

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A) Federal Housing Administration (FHA) loan B) Veterans Affairs (VA) loan C) conventional home loan D) an assumable home loan

10) Standard mortgage loans require monthly payments typically composed of two components: interest and principal repayments. When scheduled mortgage payments are insufficient to pay all of the accumulating interest, causing some interest to be added to the outstanding balance after each payment shortfall, the loan is said to be: A) fully amortizing.

B) partially amortizing.

C) nonamortizing.

D) negatively amortizing.

11) With most standard home loans, the lender can hold the borrower personally liable in the event of a default. Such loans are commonly referred to as: A) recourse loans.

B) nonrecourse loans.

C) conforming loans.

D) nonconforming loans.

12) In many commercial real estate loans, the lender cannot hold the borrower personally liable in the event of a default. Such loans are commonly referred to as: A) recourse loans.

B) nonrecourse loans.

C) conforming loans.

D) nonconforming loans.

13) Which of the following loan clauses releases the borrower from liability for fulfillment of the mortgage loan contract?

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A) demand clause B) insurance clause C) escrow clause D) exculpatory clause

14) In a mortgage agreement, the borrower conveys to the lender a security interest in the mortgage property. The lender, i.e. the individual who receives the mortgage claim, is known as the: A) broker.

B) mortgagor.

C) agent.

D) mortgagee.

15) Because the property is being pledged by the action of the borrower in a mortgage loan contract, the borrower is also referred to as the _______ of the mortgage claim.

A) broker B) mortgagor C) agent D) mortgagee

16) Violations of the requirements of a note that do not disrupt the payments on the loan tend to be viewed as “technical” defaults. In practice, how many days must a payment be overdue in order for lenders to treat a default as serious (i.e., a substantive default)?

A) one day B) 30 days C) 60 days D) 90 days

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17) When a borrower defaults on the payment requirements of a loan, there are several options that the lender has at its disposal. When the lender allows the borrower simply to convey the property to the lender rather than pursue a court supervised process of terminating all of the borrower’s claims of ownership of the property, this is commonly referred to as: A) bankruptcy.

B) foreclosure.

C) deed in lieu of foreclosure.

D) equity right of redemption.

18) Foreclosure is considered the ultimate recourse of the lender because it allows the lender to bring about sale of the property to recover the outstanding indebtedness. All of the following statements regarding foreclosure are true EXCEPT: A) Foreclosure is a costly process for all parties involved.

B) Only those claimants who are properly notified and engaged in the foreclosure suit can lose their claims to the property.

C) When a lender forecloses on a property, it extinguishes all superior liens, bringing about a free and clear sale of the property.

D) The net recovery by a lender from a foreclosed loan seldom exceeds 80 percent of the outstanding loan balance and commonly is much less than this amount.

19) The difference between judicial foreclosure and power of sale in the treatment of defaulted mortgages can be significant. All of the following statements regarding power of sale are true EXCEPT: A) The power of sale treatment is faster than judicial foreclosure.

B) The foreclosed property is typically sold through a public auction administered by the court.

C) It is less costly for power of sale to be employed than judicial foreclosure.

D) Typically, lenders must give proper legal notice to the borrower, advertise the sale property, and allow a required passage of time before the sale.

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20) The risk of bankruptcy tends to travel with the risk of foreclosure since both can result from financial distress. Known popularly by its section in the Federal Bankruptcy Code, which of the following types of bankruptcy is a court-supervised workout for a troubled business?

A) chapter 1 bankruptcy B) chapter 7 bankruptcy C) chapter 11 bankruptcy D) chapter 13 bankruptcy

21) When a buyer acquires a property having an existing mortgage loan, a decision must be made as to whether or not the subsequent owner of the property can preserve the loan. If the buyer does not add his or her signature to the note, the buyer does not take on any personal liability. In this case, the buyer is said to: A) assume the old loan.

B) purchase the property subject to the existing loan.

C) obtain the property through the use of a contract for deed.

D) foreclose on the property.

22) Most real estate loans have a definite term to maturity, stated in years. The majority of home loans will typically have a term to maturity between: A) 1-5 years.

B) 5-7 years.

C) 7-15 years.

D) 15-30 years.

23) It is possible to have a secured real estate loan without a mortgage through the use of a contract for deed. In contrast to the standard real estate sale, which of the following events occurs after the closing when dealing with a contract for deed?

A) offer B) acceptance C) possession of the property passes to the buyer D) title to the property passes to the buyer

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24) Congress has enacted a number of regulations that have established criteria for evaluating home loan applicants and mandating disclosures in the origination of home loans. Which of the following congressional acts requires important disclosures concerning the cost of consumer credit, including the computation of the annual percentage rate (APR)?

A) Equal Credit Opportunity Act (ECOA) B) Truth-in-Lending Act (TILA) C) Real Estate Settlement Procedures Act (RESPA) D) Home Ownership and Equity Protection Act (HOEPA)

25) In addition to numerous congressional acts that focus more on national regulation, laws have been created that affect the practice of home mortgage lending at a community or neighborhood level. For example, laws have been enacted to prevent lenders from avoiding certain neighborhoods without regard to the merits of the individual loan applications, a practice more commonly referred to as: A) rescinding.

B) redlining.

C) assuming.

D) holdout.

26) Assume that an individual has just lost his job and has been consistently late paying his bills. The bank recognizes deterioration in the individual’s credit score and has notified him that he must pay his home equity line of credit in full. The mortgage clause that makes this possible is known as the: A) demand clause.

B) insurance clause.

C) escrow clause.

D) exculpatory clause.

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27) The ability of homeowners to prepay the principal on their outstanding mortgage balance creates cash flow uncertainty for the lender. As a result, the lender may wish to prohibit prepayment on a mortgage loan for a specified period of time after its origination. This is accomplished through which of the following?

A) defeasance B) yield maintenance provision C) demand clause D) lockout provision

28) In certain states, such as the state of Georgia, there is a temporary transfer of title to the lender at the time the mortgage loan is made. The borrower then would obtain the rights to the title once the loan has been repaid. These states are referred to as: A) title theory states.

B) lien theory states.

C) conforming states.

D) nonconforming states.

29) A special contract in which the borrower pledges the mortgaged property as security to the lender is commonly referred to as the: A) mortgage (Deed of Trust).

B) listing contract.

C) note.

D) assignment of mortgage.

30) Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the property as long as they produce the outstanding mortgage balance and all foreclosure costs incurred to that point. In a state such as Florida, this right may even extend beyond the date of the foreclosure sale. When this occurs, this right is more commonly referred to as:

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A) equity of redemption.

B) statutory redemption.

C) strategic default.

D) substantive default.

31) In an attempt to regulate home mortgage lending after the mortgage crisis of 2007, which of the following acts created an independent oversight agency tasked with the responsibility of overseeing and enforcing Federal consumer financial protection laws, enforcing antidiscrimination laws in consumer finance, restricting unfair, deceptive or abusive acts or practices, receiving consumer complaints, promoting financial education, and watching for emerging financial risks for consumers?

A) Equal Credit Opportunity Act (ECOA) B) Truth-in-Lending Act (TILA) C) Real Estate Settlement Procedures Act (RESPA) D) Dodd-Frank Wall Street Reform and Consumer Protection Act

32) If a homeowner in mortgage distress owes more than the value of the home, and is unable to make the loan manageable by refinancing or modifying the mortgage, the next recourse often is a short sale of the property. All of the following statements are true regarding a short sale EXCEPT: A) Legal costs should be lower with a short sale than with foreclosure.

B) A short sale usually enables a better sale price and a faster sale than foreclosure.

C) A short sale is less damaging to the borrower’s credit than a foreclosure, thereby enabling the borrower to be eligible for another mortgage loan sooner.

D) A short sale relieves the seller of any other outstanding obligations on the home, such as owner association fees or a second mortgage.

33) When a borrower defaults on a mortgage loan, his or her credit record will be adversely affected. While borrowers can recover from this reduction in their credit score, if a default goes into the borrower’s records it will remain for:

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A) 6 months.

B) 1 year.

C) 5 years.

D) 7 years.

34) In certain states, such as the state of Florida, the transfer of title to the lender does not occur until the borrower defaults. These states are referred to as: A) title theory states.

B) lien theory states.

C) conforming states.

D) nonconforming states.

35) Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the property as long as they produce the outstanding mortgage balance and all foreclosure costs incurred to that point. In a state such as Georgia, this right only extends to the date of the foreclosure sale. When this occurs, this right is more commonly referred to as: A) equity of redemption.

B) statutory redemption.

C) strategic default.

D) substantive default

36) Known popularly by its section in the Federal Bankruptcy Code, which of the following types of bankruptcy is the traditional form of bankruptcy wherein the court simply liquidates the assets of the debtor and distributes the proceeds to creditors in proportion to their share of total claims?

A) chapter 1 bankruptcy B) chapter 7 bankruptcy C) chapter 11 bankruptcy D) chapter 13 bankruptcy

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37) Known popularly by its section in the Federal Bankruptcy Code, which of the following types of bankruptcy is a court supervised workout for a troubled household?

A) Chapter 1 bankruptcy B) Chapter 7 bankruptcy C) Chapter 11 bankruptcy D) Chapter 13 bankruptcy

38) Based on your understanding of the relation between the various types of bankruptcy and the foreclosure process, which of the following types of bankruptcy would you expect to be least harmful to a lender’s mortgage interest?

A) Chapter 1 bankruptcy B) Chapter 7 bankruptcy C) Chapter 11 bankruptcy D) Chapter 13 bankruptcy

39) Which of the following acts prohibits discrimination in lending practices on the basis of race, color, religion, national origin, sex, marital status, age, or because all or part of an applicant’s income derives from a public assistance program?

A) Equal Credit Opportunity Act (ECOA) B) Truth-in-Lending Act (TILA) C) Real Estate Settlement Procedures Act (RESPA) D) Home Ownership and Equity Protection Act (HOEPA)

40) Which of the following acts was passed out of concern for abusive predatory practices in subprime lending?

A) Equal Credit Opportunity Act (ECOA) B) Truth-in-Lending Act (TILA) C) Real Estate Settlement Procedures Act (RESPA) D) Home Ownership and Equity Protection Act (HOEPA)

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Answer Key Test name: chapter 9 1) C 2) D 3) C 4) C 5) C 6) B 7) C 8) C 9) C 10) D 11) A 12) B 13) D 14) D 15) B 16) D 17) C 18) C 19) B property, and allow a required passage of time before the sale.

20) C 21) B 22) D 23) D 24) B

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25) B 26) A 27) D 28) A 29) A 30) B 31) D 32) D 33) D 34) B 35) A 36) B 37) D 38) B 39) A 40) D Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) Mortgage originators can either hold loans in their portfolios or sell them to investors.

When a mortgage originator decides to sell mortgages to another institution, this transaction occurs in what is commonly referred to as the: A) primary mortgage market.

B) secondary mortgage market.

C) over-the-counter market.

D) loan origination market.

2) Which of the following types of institutions has historically been the largest purchaser of residential mortgages?

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A) commercial banks B) savings and Loans C) government sponsored enterprises D) mortgage banking companies

3) Considered the most common type of home loan, which of the following refers to any standard home loan that is not insured or guaranteed by an agency of the U.S. government?

A) conventional home loan B) Federal Housing Administration loan C) Veterans Affairs loan D) Section 203 loan

4) Mortgage loans that meet all general underwriting standards established by government sponsored enterprises except for the dollar size limit are more commonly referred to as: A) conventional loans.

B) subprime loans.

C) jumbo loans.

D) Alt-A loans.

5) Mortgage loans that fail one or more of the underwriting standards established by government sponsored enterprises are more commonly referred to as: A) conforming loans.

B) nonconforming loans.

C) government sponsored loans.

D) conventional loans.

6) Which of the following government agencies insures mortgage loans made by private lenders that are designated primarily for low-income housing, nursing homes, cooperative apartments, and condominiums?

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A) Fannie Mae B) Freddie Mac C) Federal Housing Administration D) Veteran’s Affairs

7) Created by Congress to promote an active secondary market for home mortgages, Fannie Mae and Freddie Mac purchase loans that meet specific underwriting standards such as loan size, documentation, and payment to income ratio. The loans that Fannie Mae and Freddie Mac are eligible to purchase are commonly referred to as: A) government sponsored loans.

B) conforming conventional loans.

C) nonconforming conventional loans.

D) FHA loans.

8) Since conforming loans can be much more readily bought and sold in the secondary mortgage market, they carry a(n) _______ interest rate than comparable nonconforming loans.

A) higher B) equal C) lower D) more volatile

9) Mortgage originators often offer many types and forms of available residential loans as part of their mortgage menu. However, the predominant form of prime conventional mortgage remains the: A) (fixed-rate) level payment mortgage (LPM).

B) adjustable rate mortgage (ARM).

C) subprime mortgage.

D) Alt-A mortgage.

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10) Lenders generally require private mortgage insurance (PMI) for conventional loans over 80 percent of the value of the security property. PMI protects a lender against which of the following?

A) losses due to default on the loan B) legal threat to the lender’s mortgage claim C) stoppage of mortgage payment after the death of the insured borrower D) changes in the index rate associated with an adjustable rate mortgage

11) Mortgage insurance rates vary with the perceived riskiness of the loan. Which of the following scenarios would result in a higher mortgage insurance premium?

A) lower loan-to-value ratio B) shorter loan term C) stronger credit record of the borrower D) a “cash-out” refinancing loan

12) Which of the following FHA insurance programs allows a borrower to purchase a home having deficiencies that prevent it from being financed with a standard home loan and provides money to complete repairs or enhancements once the property is acquired?

A) VA Mortgage loan B) Section 203 mortgage loan C) UFMIP mortgage loan D) conventional mortgage loan

13) The Federal Housing Administration (FHA) insures loans made by private lenders that meet FHA’s property and credit-risk standards. Which of the following statements concerning FHA insurance is true?

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A) The insurance is paid by the lender and protects the lender against loss due to borrower default.

B) The insurance is paid by the borrower and protects the lender against loss due to borrower default.

C) The insurance is paid by the lender and protects the borrower against loss due to lender default.

D) The insurance is paid by the borrower and protects the borrower against loss due to lender default.

14) Federal Housing Administration (FHA) loans differ from conventional loans in a number of ways. All of the following statements regarding FHA loans are true EXCEPT: A) FHA loans are targeted toward first-time homebuyers who are in slightly weaker financial circumstances than the typical prime conventional borrower.

B) FHA loans are more tolerant in terms of qualifying debt-to-income ratios.

C) FHA loans require higher credit scores than are needed for prime conventional loans.

D) FHA loans contain lower limits on their maximum size than are available through conforming conventional loans.

15) It would be hard to overstate the importance of the Federal Housing Administration (FHA) in the history of housing finance. Which of the following instruments created by the FHA is considered the single most important financial instrument in modern housing finance?

A) level-payment, fully amortizing loan B) adjustable rate mortgage C) partially-amortizing balloon loan D) subprime mortgage loan

16) Second mortgage loans in which borrowers borrow against the accumulated equity in their home are more commonly referred to as:

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A) purchase-money mortgage (PMM).

B) piggyback mortgage.

C) home equity loan.

D) reverse mortgage.

17) Many older, retired households are considered “house poor.” Which of the following forms of loans has been designed to help mitigate this problem by offering additional monthly income to these homeowners in exchange for a portion of their housing equity?

A) purchase-money mortgage (PMM) B) piggyback mortgage C) home equity loan D) reverse mortgage

18) In recent years, home equity loans have become a popular form of second mortgage.

Their popularity has been a result of all of the following EXCEPT: A) lower interest rates than other consumer debt.

B) shorter terms than other consumer debt.

C) tax-favored status.

D) aggressive marketing by lenders.

19) In contrast to conventional home loans, the interest-only balloon loan requires the borrower to pay off the loan with a “balloon” payment equal to the original balance after: A) 1-5 years.

B) 5-7 years.

C) 7-15 years.

D) 15-30 years.

20) The hybrid ARM attempts to balance the fixed payment desire of a borrower with the lender’s desire to increase interest rates if market rates rise in the future. In its most common form, known as a 2-28, the hybrid ARM will have a fixed-interest rate for: Version 1

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A) 1 year.

B) 2 years.

C) 26 years.

D) 28 years.

21) Mortgage loans made to borrowers with normal credit quality, but who lack the necessary documentation of their financial circumstances typically needed to meet conforming mortgage standards would most likely be considered: A) subprime loans.

B) option ARM loans.

C) hybrid ARM loans.

D) Alt-A loans.

22) Since mortgages typically have multiple costs associated with them, a borrower may attempt to reduce these costs into a single measure in order to compare two or more mortgages.

Which of the following measures is a popular tool for comparing the cost of several mortgages?

A) upfront fees B) contracted interest rate C) annual percentage rate D) teaser rate

23) A common criticism of the annual percentage rate (APR) is that it usually understates the true cost of borrowing. The APR may understate the cost of borrowing because it assumes: A) interest rates will always rise.

B) the loan always goes to maturity.

C) the actual life of the loan is shorter than maturity.

D) upfront fees should be ignored.

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24) The refinancing decision is sometimes oversimplified into a few “rules of thumb” that a borrower uses in order to gauge its potential benefits. Which of the following methodologies is criticized for its inability to account for a variation in refinancing benefits due to cost or holding period differences?

A) payback period approach B) net benefit approach C) interest rate spread D) net present value approach

25) With the arrival of subprime mortgages in recent years, a new kind of “trigger” event became apparent in leading households to default. Which of the following trigger events is primarily associated with most defaults that have occurred during the most recent subprime mortgage crisis?

A) death in the family B) divorce C) unemployment D) mortgage payment spikes

26) Suppose a buyer agrees to purchase a tract of land for $40,000. The buyer is only able to obtain a mortgage for $32,000. Rather than let the deal fall through, the seller agrees to accept $4,000 in cash and a note from the buyer for the remaining $4,000. This type of transaction is commonly referred to as a: A) conventional loan.

B) home equity mortgage.

C) purchase money mortgage.

D) reverse mortgage.

27) Suppose a homeowner is reluctant to refinance until he is reasonably sure that interest rates are not going to fall appreciably from where they currently are. In this case, the homeowner appears to be concerned about which of the following costs associated with refinancing?

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A) opportunity cost B) tax consequences C) default risk D) upfront fees

28) In recent years, mortgage lenders responded to the demand from home buyers who were unable to put 20 percent down on their purchase and were looking to avoid the private mortgage insurance (PMI) requirement that would typically accompany such a loan by developing a second mortgage that is created simultaneously with the first mortgage in an amount of ten percent of the value of the home. This enabled the borrower to obtain 90 percent financing while avoiding the additional cost of PMI. These loans are more commonly referred to as: A) reverse mortgages.

B) home equity loans.

C) piggyback mortgage loans.

D) subprime mortgage loans.

29) When a borrower decides to stop making payments on an existing mortgage loan despite having the ability to make payments (typically when the home has lost value), this is more commonly referred to as a(n): A) equity redemption.

B) statutory redemption.

C) strategic default.

D) reverse mortgage.

30) A conventional mortgage loan is one that is not insured or guaranteed by an agency of the U.S. government. The lender, however, can still pursue a private mortgage insurance (PMI) policy to provide a guarantee for the fulfillment of the borrower’s obligations. Typically PMI is required for all loans that have a loan to value (LTV) ratio greater than:

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A) 20%.

B) 40%.

C) 60%.

D) 80%.

31) FHA mortgage insurance covers any lender loss after conveyance of title of the property to the U.S. Department of Housing and Urban Development (HUD). FHA mortgage insurance requires two premiums to be paid: the UFMIP (up-mortgage insurance premium) and the MIP (monthly insurance premium). Currently, the UFMIP is what percentage of the loan for normal loans used to purchase a personal residence?

A) 1.00% B) 1.75% C) 2.50% D) 4.00%

32) In addition to the UFMIP (up-front mortgage insurance premium), the owner-occupant borrower who decides to use an FHA mortgage loan will normally pay an additional annual mortgage insurance premium (MIP) that depends on the loan-to-value ratio and the term of the loan. As of 2019, the MIP ranged from ____________ percentage of the average annual loan balance?

A) 0.25% to 0.35% B) 0.40% to 0.85% C) 0.90% to 1.10% D) 1.15% to 1.25%

33) Mortgage loans that allow the borrower to switch among a variety of payment arrangements throughout the life of the loan are more commonly referred to as:

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A) subprime loans.

B) option ARM loans.

C) hybrid ARM loans.

D) Alt-A loans.

34) The loan origination market, in which borrowers and lenders come together to provide adequate financing for the purchase of a property, is more commonly referred to as the: A) primary mortgage market.

B) secondary mortgage market.

C) over-the-counter market.

D) government sponsored market.

35) The Dodd-Frank Wall Street Reform and Consumer Protection Act created an important new class of home mortgages that is aimed at helping mortgage lenders implement an “ability to repay” standard imposed by the law. These mortgages are more commonly referred to as: A) subprime mortgage loans.

B) qualified mortgage loans.

C) hybrid mortgage loans.

D) Alt-A mortgage loans.

36) To be considered a qualified mortgage, the loan must have specific features and meet designated underwriting requirements. Based on your understanding of what constitutes a qualified mortgage, all of the following features describe a qualified mortgage EXCEPT: A) The loan cannot exceed 30 years in maturity.

B) The loan cannot have fees in excess of three percent (if the loan is greater than $100,000).

C) The loan cannot have a debt-to-income ratio greater than 43 percent.

D) The loan does not require verification of underwriting information from third party records.

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37) Based on your understanding of the risks associated with different mortgage loan types, which of the following mortgage loans would be considered the safest with respect to default risk?

A) subprime mortgage loans B) qualified mortgage loans C) option ARM loans D) Alt-A mortgage loans

38) Assume that a veteran decides to purchase a house for $150,000 using a VA loan that amounts to $44,000. If the buyer were to defaults on the loan, what is the maximum amount that the VA guarantees the lender?

A) $11,000 B) $22,000 C) $33,000 D) $44,000

39) Considering the following information, what is the NPV if the borrower refinances the loan?

Expected holding period: 15 years Current loan balance: $100,000 Current loan interest: 7% Current loan mortgage payment: $898.33 Remaining term on current mortgage: 15 years New loan interest: 5.5% New loan mortgage payment: $817.08 New loan term: 15 years Cost of refinancing: $5,000 Assume that the opportunity cost is the interest rate on the new loan (5.5%).

A) −$5,000.00 B) −$56.52 C) $4,943.48 D) $9,943.48

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40) Considering the following information, what is the NPV if the borrower refinances the loan?

Expected holding period: 3 years Current loan balance: $100,000 Current loan interest: 7% Current loan mortgage payment: $898.33 Remaining term on current mortgage: 15 years New loan interest: 5.5% New loan mortgage payment: $817.08 New loan term: 15 years Cost of refinancing: $5,000 Assume that the opportunity cost is the interest rate on the new loan (5.5%).

A) −$5,000.00 B) −$1,155.27 C) $3,844.73 D) $8,844.73

41) Suppose that you are in the process of deciding whether or not to refinance your fixed rate mortgage at a lower rate and you are interested in using the payback period rule of thumb to help you in your decision. Your lender has informed you that the cost of refinancing would be $4,300. If your original monthly mortgage payment was $1,250 and your new monthly mortgage payment would be $1,150 after refinancing, determine the payback period.

A) 3 months B) 4 months C) 43 months D) 158 months

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42) Suppose you have just purchased your first home for $300,000. At the time of purchase you could afford to commit 20% of the purchase price to a down-payment. Suppose over time you paid down the principal of the loan to $220,000 and at that point in time you can no longer make any mortgage payments (i.e., you default on the loan). If the lender were to foreclose on your property and sell it for $190,000, determine the amount of the loan’s principal that the lender was unable to recover due to the default.

A) $30,000 B) $50,000 C) $240,000 D) $300,000

43) Suppose you have just purchased your first home for $300,000. At the time of purchase you could only afford to commit to a down-payment of $15,000. In order to make the loan, the lender requires you to obtain private mortgage insurance (PMI) on their behalf. Suppose over time you paid down the principal of the loan to $280,000 and at that point in time you can no longer make any mortgage payments (i.e., you default on the loan). If the lender were to foreclose on your property and sell it for $228,000, what would the lender’s loss of principal be taking into consideration the protection of mortgage insurance? (Let’s assume that the PMI in this case covers the top 30% of the loan.)

A) $0 B) $52,000 C) $57,000 D) $72,000

44) Suppose you are interested in obtaining a mortgage loan for $250,000 in order to purchase your principal residence. Your lender has suggested that you might be interested in taking an FHA loan. In order to do so, you must pay an additional up-front mortgage insurance premium (UFMIP) of 1.0% of the mortgage balance. If the interest rate on the fully-amortizing mortgage loan is 5% and the term is 30 years, what is your monthly mortgage payment assuming the UFMIP is financed?

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A) $1,342.05 B) $1,355.47 C) $1,498.88 D) $2,500

45) Suppose you are interested in taking an FHA mortgage loan for $350,000 in order to purchase your principal residence. In order to do so, you must pay an additional up-front mortgage insurance premium (UFMIP) of 1.0% of the mortgage balance. If the interest rate on the fully-amortizing mortgage loan is 6% and the term is 30 years and the UFMIP is financed (i.e., it is included in the loan amount), what is the dollar portion of your monthly mortgage payment that is designated to cover the UFMIP? A) $20.98 B) $291.67 C) $2,119.41 D) $3,500.00

46) Suppose you have obtained a 6%, 30 year fully-amortizing FHA mortgage loan of $152,625 to finance the purchase of your primary residence. In so doing, you must pay an additional mortgage insurance premium (MIP) of 1.10%. If the first-year average loan balance is $151,775.25, determine the first-year monthly insurance premium payment.

A) $139.13 B) $1,025.69 C) $1,669.53 D) $1,678.88

47) In a fixed-term, level-payment reverse mortgage, sometimes called a reverse annuity mortgage, or RAM, a lender agrees to pay the homeowner a monthly payment, or annuity, and expects to be repaid from the homeowner’s equity when he or she sells the home or obtains other financing to pay off the RAM. Consider a household that owns a $150,000 home free and clear of mortgage debt. The RAM lender agrees to a $100,000 RAM for 10 years at 6 percent. Assume payments are made annually, at the beginning of each year to the homeowner. Calculate the annual payment on the RAM.

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A) $7,157.35 B) $7,586.80 C) $12,817.73 D) $13,586.80

48) Suppose you are thinking about purchasing a small office building for $1,500,000. The 30 year fixed rate mortgage that you have arranged covers 80% of the purchase price and has an interest rate of 8%. Assume you were to default and go into foreclosure in year 10 of this loan. If the lender was able to sell this property for $700,000, how much does the lender stand to lose in the absence of PMI? A) $0 B) $92,696 C) $260,000 D) $352,696

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

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27) A 28) C 29) C 30) D 31) B 32) B 33) B 34) A 35) B 36) D 37) B 38) B 39) C 40) B 41) C 42) A 43) A 44) B 45) A 46) A 47) A 48) D Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) Having a solid grasp of the appropriate scale of financial data is an important first step in any form of analysis. Based on your understanding of the relative size of the U.S. mortgage market, which of the following best represents the approximate amount of mortgage debt outstanding in the U.S. as of the end of 2018?

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A) $15 thousand B) $15 million C) $15 billion D) $15 trillion

2) As of the end of 2018, which of the following types of mortgage loans accounts for the greatest percentage of mortgage debt outstanding?

A) residential (1-4 family) B) apartment (multifamily) C) commercial D) farm

3) To put into perspective the amount of residential mortgage debt outstanding, it is useful to compare this market to other prominent sources of available debt. Listing the issuer with the largest amount of debt outstanding first, which of the following choices best depicts the relative rank ordering amongst the major sources of outstanding debt in the U.S. as of the end of 2018?

A) residential mortgage debt, marketable U.S. government bonds, corporate bonds, consumer credit B) marketable U.S. government bonds, residential mortgage debt, corporate bonds, consumer credit C) corporate bonds, marketable U.S. government bonds, residential mortgage debt, consumer credit D) consumer credit, residential mortgage debt, marketable U.S. government bonds, corporate bonds

4) In the early 1970’s, home mortgage lenders were predominantly depository institutions focused on collecting local savings deposits and using these funds to make local mortgage loans.

The savings institutions of this era of mortgage financing are more commonly referred to as:

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A) thrifts.

B) mortgage brokers.

C) mortgage banks.

D) commercial banks.

5) Depository institutions primarily engaged in the business of making short-term loans to businesses for inventory financing and other working capital needs are more commonly referred to as: A) thrifts.

B) mortgage brokers.

C) mortgage banks.

D) commercial banks.

6)

Which of the following entities is a primary example of a portfolio lender?

A) thrift B) mortgage broker C) mortgage bank D) government sponsored enterprise

7) In the early 1970’s, home mortgage lenders were predominantly depository institutions.

By the end of the decade, the growth of deposits at these institutions became negative due to the emergence of more attractive investment opportunities such as money market funds. This change in the distribution chain of funds is more commonly referred to as: A) deregulation.

B) disintermediation.

C) warehousing.

D) underwriting.

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8) In 1989, Congress took major steps to establish depository institution accountability by requiring these institutions to hold more capital as they take on riskier assets. Which of the following Congressional acts imposed these capital standards on depository institutions?

A) Depository Institutions Deregulation and Monetary Control Act B) Financial Institutions Reform, Recovery, and Enforcement Act C) Secure and Fair Enforcement for Mortgage Licensing Act D) Riegle Community Development and Regulatory Improvement Act

9) In addition to providing home mortgages, large commercial banks have specialized in providing short-term funds to mortgage banking companies in order to enable them to originate mortgage loans and hold the loans until the mortgage banking company can sell them in the secondary market. This type of financing is commonly referred to as: A) mortgage pipeline.

B) loan servicing.

C) warehousing.

D) loan underwriting.

10) The emergence of mortgage securities propelled the development of mortgage companies, an entity significantly different from the thrifts and banks that previously dominated the mortgage landscape. Which of the following parties is responsible for providing mortgage origination services and initial funding within this new framework?

A) mortgage banker B) mortgage broker C) portfolio lender D) security analyst

11) Mortgage banks typically will attempt to sell loans as quickly as possible after they are originated by either issuing mortgage securities or selling the loan to an intermediary that will subsequently sell the loan in the secondary market. The period between loan commitment and loan sale is referred to as the:

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A) mortgage pipeline.

B) mortgage note.

C) mortgage fallout.

D) mortgage term.

12) Throughout the process of originating and selling mortgages, mortgage companies face a number of risks. Therefore, it is important for a lending institution to evaluate the risks of mortgage loan default through a process commonly referred to as: A) mortgage fallout.

B) loan servicing.

C) warehousing.

D) loan underwriting.

13) When a mortgage is used as collateral for the issuance of a mortgage-backed security (MBS), the underlying mortgage is said to be “securitized.” Approximately what percentage of conventional conforming and FHA or VA loans in the U.S. are being sold into the secondary market and being used as collateral for the issuance of MBS? A) 25% B) 50% C) 90% D) 100%

14) In the late 1960’s, Congress created a number of agencies designed to address a struggling secondary market for residential mortgages. Which of the following organizations was developed primarily to guarantee mortgage-backed securities based on pools of FHA, VA and Rural Housing Service loans, rather than issue, buy or sell mortgages?

A) Federal National Mortgage Association (Fannie Mae) B) Government National Mortgage Association (Ginnie Mae) C) Federal Home Loan Mortgage Corporation (Freddie Mac) D) Federal Agricultural Mortgage Corporation (Farmer Mac)

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15) In the securitization process, mortgages are pooled together and cash flows are packaged into securities to be sold in the secondary market. Agencies and private companies that pool mortgages and sell mortgage-backed securities (MBS) are often referred to as: A) thrifts.

B) credit unions.

C) conduits.

D) automated underwriters.

16) The Federal National Mortgage Association (Fannie Mae) was originally established to provide a secondary market for FHA-insured and VA-guaranteed loans. All of the following statements regarding Fannie Mae are true EXCEPT: A) Fannie Mae lends money directly to homebuyers.

B) Fannie Mae was once a private, self-supporting company with publicly traded stock that has now been placed into conservatorship by the United States government following the mortgage crisis of 2007-2008.

C) Fannie Mae fully guarantees timely payment of interest and principal to investors.

D) Fannie Mae is authorized to buy both conventional home loans and governmentsponsored residential mortgages.

17) In the modern framework of home mortgage lending, there are four channels by which first mortgage home loans are created. Within which of the following channels would you typically find a Wall Street investment bank obtaining loans, pooling loans, and creating a senior-subordinate security structure?

A) traditional direct (portfolio) lending B) FHA/VA loan securitization C) conforming conventional loan securitization D) nonconforming Conventional loan securitization

18) Traditional home mortgage underwriting is said to rest on three elements, the “three C’s.”

The housing expense ratio is one tool that lenders will use to address concerns associated with which of the “three C’s?”

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A) collateral B) creditworthiness C) capacity D) capability

19) Traditional home mortgage underwriting is said to rest on three elements, the “three C’s.”

The debt-to-income ratio is one tool that lenders will use to address concerns associated with which of the “three C’s?”

A) collateral B) creditworthiness C) capacity D) capability

20) Recently, mortgage banking has become the natural method for doing mortgage lending.

Within the mortgage lending process, which of the following roles serves as the primary revenue source for mortgage banks?

A) loan commitment B) loan funding C) loan servicing D) loan sales

21) Suppose that a mortgage bank “locked in” an interest rate for a prospective borrower at 8.5%. However, prior to the loan closing, the market mortgage rate falls to 7.5 %. In this scenario, the mortgage banker would be most concerned with which of the following risks?

A) prepayment risk B) fallout risk C) default risk D) liquidity risk

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22) The development of Fannie Mae and Freddie Mac established the framework for a liquid secondary market for residential mortgages. In 2018, the share of all residential mortgage loans owned or securitized by Fannie Mae and Freddie Mac approached approximately: A) 5%.

B) 16%.

C) 44%.

D) 76%.

23) Despite many innovations in the lending process that made mortgage loans more accessible and affordable to the general public, many potential borrowers faced considerable barriers in qualifying for a loan and making a down payment. Which of the following types of loans was designed for a borrower with weak credit, those who seek 100 percent financing, or who cannot document their income?

A) conventional prime home loan B) affordable housing loan C) subprime mortgage loan D) bridge loan

24) Traditional home mortgage underwriting is said to rest on three elements, the “three C’s.”

Recent research (e.g., Archer and Smith, 2011) has confirmed that the underwriting characteristic most strongly associated with default is: A) collateral.

B) creditworthiness.

C) capacity.

D) capability.

25) In analyzing a borrower’s credit worthiness, the lender will typically examine the borrower’s FICO score (a product developed by the Fair Isaac Corporation). High quality borrowers with a credit score above 660 are more commonly referred to as:

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A) prime borrowers.

B) subprime borrowers.

C) conduit borrowers.

D) wholesale borrowers.

26) The traditional approach to loan underwriting has virtually been replaced by an automated underwriting process that involves a statistically derived equation to determine the level of default risk associated with a loan application. All of the following statements regarding the automated underwriting process are true EXCEPT: A) The marginal cost per loan underwritten using the automated process is greater than the case of traditional underwriting.

B) The time taken to approve a loan using the automated process is considerably shorter than the case of traditional underwriting.

C) The success in identifying risky loans is higher using the automated process than is the case with traditional underwriting.

D) Automated underwriting has made home ownership available to households for whom it previously was inaccessible.

27) In the process of deciding whether to extend a mortgage loan to a prospective borrower, lenders typically examine three elements, more commonly referred to as the “3 C’s.” Which of the following metrics does a bank use to evaluate the collateral piece of the loan agreement?

A) loan-to-value ratio B) payment-to-income ratio C) credit score D) housing expense ratio

28) When the contract rate at closing is less than the current market rate (i.e., interest rates have increased since the time of the loan commitment), the mortgage banker will have to sell the newly originated loan at a discount. This scenario best depicts the mortgage banker’s exposure to which of the following risks?

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A) interest rate risk B) fallout risk C) default risk D) liquidity risk

29) When the mortgage banker originates a home loan, she actually creates two assets: the loan and the servicing rights. Servicing fees typically range from: A) 0.00-0.18 percent of the outstanding loan balance.

B) 0.19-0.44 percent of the outstanding loan balance.

C) 0.45-0.74 percent of the outstanding loan balance.

D) 0.75-0.99 percent of the outstanding loan balance.

30) The Dodd-Frank Act ushered in a new standard for home mortgage underwriting. Which of the following standards is now required of any lender when underwriting a home loan?

A) ability-to-repay standard B) ability-to-prepay standard C) ability-to-securitize standard D) ability-to-lend standard

31) Loan servicing includes a number of responsibilities such as collecting monthly mortgage payments from the borrower, remitting principal and interest payments to investors, ensuring sufficient escrow payments are being made by the borrower, and managing default if it should arise. In exchange for these services, mortgage bankers receive a fee. If the outstanding loan balance is $250,000 and the annual servicing fee is 0.35%, what is the monthly fee for servicing the loan?

A) $72.92 B) $729.17 C) $875.00 D) $8,750.00

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32) In ascertaining whether a borrower has the ability to pay off his loan over time, a mortgage bank may rely on calculating a total debt ratio as part of its underwriting process.

Utilizing the following information, calculate the total debt ratio.

Monthly principal and interest on mortgage loan: $635 Monthly Tax and insurance payments into escrow: $125 Monthly Car lease payment (lease term is 3 years): $350 Gross monthly income: $2,500 A) 25.4% B) 30.4% C) 44.4% D) 53.2%

33) Suppose an institution has purchased a $250,000 mortgage loan from the loan originator and wishes to create a mortgage pass-through security. In doing so, this institution will generate revenue by charging a servicing fee of 35 basis points. If the monthly mortgage payment on the loan is $1,250, how much income is passed through to the investor in the mortgage pass through each month (rounded to the nearest dollar)?

A) $73 B) $375 C) $875 D) $1177

34) Utilizing the following information, calculate the housing expense ratio.

Monthly Principal and interest on mortgage loan: $635 Monthly Tax and insurance payments into escrow: $125 Gross monthly income: $2,500 A) 25.4% B) 30.4% C) 44.4% D) 53.2%

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35) A lender is considering whether to approve a mortgage loan on a home recently appraised at a value of $500,000. If the borrower is willing to make a down payment of $100,000, determine the loan-to-value ratio associated with this property.

A) 20% B) 40% C) 60% D) 80%

36) Let’s suppose that a lender has established a 90 percent loan-to-value ratio cutoff as one of its primary underwriting criteria. If a borrower is willing to make a down payment of $125,000 on a home recently appraised at $550,000, which of the following best describes the lender’s decision on whether or not to approve the loan along this dimension?

A) The lender approves the loan because the LTV ratio is less than 90 percent.

B) The lender denies the loan because the LTV ratio is less than 90 percent.

C) The lender approves the loan because the LTV ratio is greater than 90 percent.

D) The lender denies the loan because the LTV ratio is greater than 90 percent.

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

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27) A 28) A 29) B 30) A 31) A 32) C 33) D 34) B 35) D 36) A Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) Real estate brokers serve as intermediaries by bringing buyers and sellers together in the real estate market. For this service, brokers are paid what is commonly referred to as a: A) commission.

B) licensing fee.

C) recovery fee.

D) listing fee.

2) The importance of brokers in the real estate market is often overlooked. In the absence of a real estate broker, one would expect all of the following to be true EXCEPT: A) The asking price would most likely be higher, on average, than in the case where a broker was involved because the seller is in total control of the sale.

B) A seller would most likely rely on a “thinner” market (i.e. the seller has access to fewer prospective buyers).

C) It would be more difficult for an individual to buy a property.

D) Buyers would be more inclined to negotiate prices downward by at least the value of a typical commission.

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3) Under the law of agency, a real estate broker is given the right to act on behalf of another individual or entity who is trying to buy or sell a property. The individual or entity that grants authority to the broker to act on their behalf is more commonly referred to as the: A) principal.

B) agent.

C) fiduciary.

D) appraiser.

4) When the principal in an agency relationship delegates the power to act on all materials that can be delegated in place of the principal, the agent is more commonly referred to as a: A) universal agent.

B) general agent.

C) special agent.

D) dual agent.

5) When the principal in an agency relationship delegates the power to act within the confines of a business or employment relationship, the agent is more commonly referred to as a: A) universal agent.

B) general agent.

C) special agent.

D) dual agent.

6) Real estate brokers operate under the law of agency, which gives a broker the right to act for a principal in trying to buy or sell a property. In the basic principal-agent relationship of real estate brokerage, real estate brokers act in the capacity of a: A) universal agent.

B) general agent.

C) special agent.

D) undercover agent.

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7) In acting as an agent for another person, the broker carries several special responsibilities, which by law must be adhered here to throughout the transaction process. These responsibilities constitute what is commonly referred to as a: A) subagency relationship.

B) dual agency relationship.

C) fiduciary relationship.

D) open listing relationship.

8) Modern real estate brokerage normally relies on a multiple listing service (MLS) through which brokers have access to each other’s listings. Which of the following types of agency agreements is established with the use of a MLS? A) single agency agreement B) subagency agreement C) dual agency agreement D) designated agent agreement

9) One solution for addressing conflicts of interest that arise from dual agency scenarios is for a broker to appoint a separate salesperson to represent each client. The appointed agent is considered a: A) universal agent.

B) general agent.

C) dual agent.

D) designated agent.

10) In dual agency, conflicts of interest may arise since a single broker has both the listing contract with the seller and a buyer agency agreement with the purchaser. One way that states have attempted to deal with this issue is to develop a new type of brokerage relationship in which the broker assists the buyer and seller, but does not represent either party. This type of brokerage relationship is commonly referred to as:

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A) unintended dual agency.

B) universal agency.

C) transaction brokerage.

D) multiple listing.

11) State licensing laws generally prescribe two levels of real estate brokerage licensing: the broker license and the salesperson license. Which of the following responsibilities is an individual with a salesperson license permitted to do?

A) own and operate a real estate brokerage business B) handle money in trust for clients C) negotiate listing contracts or contracts for sale D) complete legal documents used in sales and leases in their own name

12) All 50 states have licensing laws that regulate persons and companies that engage in the brokerage business. Interpreting and enforcing state licensing laws falls under the responsibilities of which of the following parties?

A) broker B) real estate commission C) National Association of Realtors D) salesperson

13) One of the traditional requirements for individuals who wish to obtain a brokerage license has been to demonstrate financial capacity to cover damage judgments brought against them by clients. In order to address this concern, some states have required licensees to first obtain: A) private mortgage insurance (PMI).

B) errors and omission insurance.

C) deposit insurance.

D) hazard insurance.

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14) State licensing laws prescribe behavioral requirements with which licensees must comply to keep their licenses. Licensing laws generally seek to prevent brokers from partaking in all of the following activities EXCEPT: A) handling money in trust for clients.

B) taking kickbacks without the employer’s knowledge.

C) offering the property at terms other than those specified by clients.

D) failure to submit all offers to the client.

15) It is common for real estate firms to identify submarkets, such as property types or particular sections of a city, in which they can specialize and concentrate their transaction activity. This practice is referred to as: A) internet marketing.

B) open listing.

C) discount brokerage.

D) market segmentation.

16) Although the function of commercial brokerage is the same as that of residential brokerage, the activities of commercial brokers usually differ considerably from those of residential brokers due to fundamental differences in these two markets. All of the following statements regarding commercial brokerage are true EXCEPT: A) Relative to residential transactions, commercial transactions tend to be larger.

B) The parties in commercial mortgage transactions are typically less knowledgeable than those in residential transactions.

C) An important part of the commercial broker’s service is to provide the prospective buyer with reports that enable him to complete due diligence for the property.

D) Commercial brokers are often required to lower their commission in order to negotiate compromises between buyers and sellers when they reach an impasse over price.

17) Blockbusting, which involves persuading an individual to sell her home by telling her that minority groups are moving into the neighborhood, is one form of discrimination in housing that is prohibited by which of the following acts of Congress?

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A) Riegle Community Development and Regulatory Improvement Act B) Secure and Fair Enforcement for Mortgage Licensing Act C) Fair Housing Act (Title VIII of the Civil Rights Act) D) Equal Credit Opportunity Act

18) Critical to any listing contract is the question of when the broker becomes entitled to a commission. Traditionally, the broker is still entitled to a commission in all of the following scenarios EXCEPT: A) If the seller refuses to sell upon being presented with an offer meeting the original terms and conditions.

B) If the seller cannot deliver the property for any reason due to his or her fault.

C) If both the buyer and seller sign a contract but then agree to cancel it.

D) If a contract is contingent upon the buyer obtaining financing and the buyer is unable to do so.

19) There are a number of different types of listing contracts that can be used when marketing a property. Which of the following types of listings requires the broker to be paid a commission if any other broker, or even the owner, sells the property during the contract period?

A) open listing B) single listing C) exclusive agency listing D) exclusive right of sale listing

20) The recent emergence of discount brokerage services has had a modest effect on the price of brokerage services. The average commission that a broker could expect to receive today would most likely range between: A) 1-2%.

B) 3-4%.

C) 5-6%.

D) 7-10%.

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21) Federal and state laws prohibit discrimination in housing. However, exemptions do exist depending on the particular type of property that is being considered. All of the following activities could be considered exempt in specific scenarios EXCEPT: A) refusing to sell or rent to a person because of race.

B) refusing to sell or rent based on familial status (i.e. having children).

C) refusing to sell or rent to persons based on age.

D) refusing to sell or rent a single-family home based on religion provided the owners do not employ the services of a broker or agent.

22) According to the law of agency, real estate brokers are required to observe several duties as they act as an agent for an individual trying to buy or sell a property. Which of the following duties refers to a broker’s obligation to be completely open and honest with the principal?

A) disclosure B) confidentiality C) loyalty D) obedience

23) In determining the appropriate listing contract to be used, it is important to know whether a multiple listing service (MLS) will be employed. The MLS only accepts which of the following types of listing contracts?

A) open listing B) FSBO listing C) exclusive agency listing D) exclusive right of sale listing

24) As an agent for the buyer or seller, a broker has 6 basic fiduciary responsibilities. Which of the following definitions best describes the responsibility of “Obedience”?

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A) Broker must follow the instructions of the principal to the limits of what is legal and ethical.

B) Broker must keep principal informed of all changes in the financials of the negotiation.

C) Broker must not convey information about principal’s financial status or motivations.

D) Broker must never subordinate the best interest of the principal to the interests of others, including himself/herself.

25) There are a number of different types of listing contracts that can be used when marketing a property. Which of the following types of listings requires the broker to be paid a commission if anyone, other than the owner, sells the property during the contract period?

A) open listing B) FSBO listing C) exclusive agency listing D) exclusive right of sale listing

26) There are a number of different types of listing contracts that can be used when marketing a property. Which of the following types of listings allows property owners to list the property with more than one broker?

A) open listing B) discount listing C) multiple listing D) exclusive right of sale listing

27) Which of the following duties refers to a broker’s obligation to never subordinate the best interest of their principal to the interests of others?

A) disclosure B) confidentiality C) loyalty D) obedience

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28) Which of the following duties refers to a broker’s obligation to keep the principal informed about financial aspects of their assignment?

A) disclosure B) accounting C) loyalty D) skill and care

29) Which of the following duties refers to a broker’s obligation to represent the interests of their principals to the best of their ability in the same way they would represent themselves, acquiring and applying the necessary knowledge and information about relevant laws and regulations, the market, and subject property?

A) disclosure B) accounting C) loyalty D) skill and care

30) There are three basic types of listing contracts. These include all of the following EXCEPT: A) open-listing.

B) exclusive agency listing.

C) exclusive right of sale listing.

D) multiple listing.

31)

In an open-listing contract, an individual broker is entitled to a commission if: A) anyone, including the seller sells the property.

B) anyone, excluding the seller sells the property.

C) she procures the buyer of the property.

D) she markets the property, but it does not sell.

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32) Suppose that a recent purchase of a residential home has been facilitated equally by a listing agent and a buyer broker. Based on your understanding of how commissions are determined, which of the following scenarios best describes who would be entitled a commission upon sale of the property (Note: For simplicity, you can assume the seller did not procure the buyer on their own)?

A) only the listing broker B) only the buyer broker C) both the listing broker and the buyer broker D) neither the listing broker nor the buyer broker

33) Suppose you are interested in selling your home and would like to clear a net value of $300,000. If you have agreed to pay your broker a commission of 5.5% (no matter who ultimately is responsible for finding the buyer), what price must you sell the home for in order to meet your net profit (rounded to the nearest dollar)?

A) $282,540 B) $300,000 C) $316,500 D) $317,460

34) Christopher has hired a real estate broker to help facilitate the sale of his home. Realizing that Christopher is most likely going to realize a loss on his investment due to the recent decline in housing values in his neighborhood, the broker has agreed to charge Christopher a lower commission rate as long as Christopher enters into an exclusive right of sale listing contract. If Christopher ends up selling his house for $364,583 and takes home $350,000 after paying the real estate broker’s commission, what was the commission rate that the broker ended up charging?

A) 4.0% B) 4.2% C) 8.0% D) 14.6%

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35) Jonathan recently sold his home and was able to take home $423,000 after paying the real estate broker’s commission of 6%. If the buyer was ultimately found through a buyer broker, the dollar commission will need to be split between the listing broker and buyer broker. If the buyer broker is entitled to 40% of the commission, what is her share of the commission rounded to the nearest dollar?

A) $10,800 B) $13,500 C) $16,200 D) $27,000

36) Jim has hired a real estate broker to help facilitate the sale of his home. If the broker requires a commission of 6%, how much will Jim clear from the sale (after the commission has been paid) if he is able to sell his house for $478,723? (Assume that Jim has already paid off his mortgage.)

A) $424,528 B) $450,000 C) $478,723 D) $507,446

37) Amy is trying to decide whether or not it would be beneficial to employ the services of a real estate broker in order to facilitate the sale of her home. She has estimated that the marketing costs and opportunity cost associated with time spent dealing with prospective buyers amounts to $5,000. If Amy were to sell the house on her own for $200,000, but a broker would have been able to negotiate a higher price of $206,350, what commission rate should Amy have been willing to accept from a real estate broker to make her indifferent between selling the house on her own and hiring a real estate broker?

A) 2.4% B) 3.1% C) 5.0% D) 5.5%

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

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27) C 28) B 29) D 30) D 31) C 32) C 33) D 34) A 35) A 36) B 37) D Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) The successful conveyance of real estate depends on a well-formed contract for sale since the contract dictates the rights and type of deed involved, as well as choreographs the entire transaction. Which of the following features of the contract for sale refers to the arrangements agreed to by the parties, such as price and date of closing?

A) contract terms B) contract conditions C) equitable title D) contingency clause

2) Any contract, whether it is for the sale of real estate or some other entity, must contain five basic elements. However, any contract for the sale of real estate must adhere to two additional requirements. Which of the following contract elements is an additional requirement that must be satisfied in a contract for sale of real estate that isn’t necessarily a part of other contracts?

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A) no defects to mutual assent B) consideration C) offer and acceptance D) written form

3)

The value given up, or promise made, by each party in a contract is referred to as: A) acceptance.

B) consideration.

C) assent.

D) equitable title.

4) While the principal parties to a transaction must be legally competent for a contract to be valid, it is possible for a party acting on behalf of a principal to obtain this legal right. In order for personal representatives and trustees to be authorized to act on behalf of a principal, a legal instrument commonly referred to as ____________ must be in place.

A) assignment B) power of attorney C) mutual assent D) consideration

5) Both parties to a valid and enforceable contract must provide consideration. In a contract for the sale and purchase of real estate, which of the following depicts the seller’s consideration?

A) A meeting of the minds with the buyer.

B) The option to present a counteroffer.

C) The property to be given up.

D) The money or goods that constitute the purchase price.

6) In certain circumstances, mutual assent between the contracting parties may be broken, thus invalidating the contract. Which of the following defects to mutual assent involves compelling a person to act by the use of force?

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A) One of the parties is under duress.

B) One of the parties is under undue influence.

C) One of the parties is under menace.

D) One of the parties is committing fraud.

7)

Which of the following defects to mutual assent involves intentional misrepresentation?

A) One of the parties is under duress.

B) One of the parties is under undue influence.

C) One of the parties is under menace.

D) One of the parties is committing fraud.

8) Which of the following defects to mutual assent involves the abuse of the control that one person has over another?

A) One of the parties is under duress.

B) One of the parties is under undue influence.

C) One of the parties is under menace.

D) One of the parties is committing fraud.

9) Which of the following defects to mutual assent involves the use of the threat of force to compel a person to act?

A) One of the parties is under duress.

B) One of the parties is under undue influence.

C) One of the parties is under menace.

D) One of the parties is committing fraud.

10) as:

The right of someone to obtain full, legal title to real estate is more commonly referred to

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A) consideration.

B) equitable title.

C) conveyance of title.

D) contract of sale.

11)

Ownership of a freehold estate is referred to as: A) consideration.

B) equitable title.

C) conveyance of title.

D) legal title.

12) The distinction between legal title and equitable title is an important concept in the contract for sale of real estate. When the buyer obtains equitable title, the seller can no longer sell the property to someone else, even though the legal title has not officially passed on. In the contract for sale process, the creation of equitable title occurs when: A) the contract for sale is written.

B) the contract for sale is signed.

C) the contract terms are orally agreed upon.

D) each party is deemed legally competent.

13) Since the issues in many transactions are similar, brokers often use standard preprinted contract forms. Generally, the best standard form contracts are those prepared and approved by which of the following parties?

A) office supply firm B) seller C) local board of realtors D) web source of generic legal forms

14) When one party’s contractual rights and obligations are transferred to someone else, it is more commonly referred to as contract: Version 1

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A) assignment.

B) recission.

C) closing.

D) consideration.

15) Contracts for sale may contain sections that cause implementation of the contract to depend on the successful completion of some prior action such as the buyer’s ability to obtain financing on specified terms. This type of contract is commonly referred to as a(n): A) contract assignment.

B) equitable title.

C) contract with contingencies.

D) uniform settlement statement.

16) In general, most contracts – including a real estate contract – can be assigned. All of the following statements regarding assignment are true EXCEPT: A) any type of personal performance contracted by one party cannot be assigned without that party’s permission.

B) land contracts are not assignable without the owner’s permission.

C) if buyers of real estate assign the contract, the new buyers may pay the agreed upon price and obtain title to the property.

D) when buyers assign their rights to someone else, they escape liability under the original contract.

17) When a party in a contract fails to perform (e.g. breach of contract, nonperformance, or default) the other party has a variety of remedies. All of the following are remedies that an aggrieved seller may pursue EXCEPT: A) sue for damages.

B) retain the earnest money deposit as liquidated damages.

C) agree to rescission of the contract.

D) sue for specific performance.

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18) The final step in a real estate transaction is the closing. In most closings, which party is responsible for seeing that the closing is completed successfully?

A) escrow agent B) lender C) selling broker D) listing broker

19) Placed under the umbrella of the Consumer Financial Protection Bureau as part of the Dodd-Frank Act of 2010, the Real Estate Settlement Procedures Act (RESPA) requires loan settlement information to be prepared on a special form known as the: A) Closing disclosure.

B) Servicing agreement.

C) "Your Home Loan Toolkit” booklet.

D) certificate of occupancy.

20) While fee splitting between cooperating real estate brokers is permitted, RESPA explicitly prohibits such actions as rebating part of the title insurance premium to the lender who recommended or required the title insurance. These unearned fees are commonly referred to as: A) commissions.

B) kickbacks.

C) damages.

D) specific performance dues.

21) In accordance with RESPA, whenever a buyer obtains a new first mortgage loan from a chartered or insured lender, when the loan is insured by the FHA or guaranteed by the VA, or when the loan will be sold to one of the federally related secondary mortgage market agencies, an estimate of loan costs must be provided by the lender within:

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A) 3 business days.

B) 5 business days.

C) 30 calendar days.

D) 90 calendar days.

22) When a buyer signs an offer to purchase a property, the broker receives a monetary amount from the purchaser of 5 or 10 percent of the purchase price. This deposit is commonly referred to as the: A) commission.

B) earnest money.

C) closing cost.

D) title insurance premium.

23) Since the seller often has utilized the property for a portion of the year in which the transaction is being made, certain costs associated with the property will be prorated at the closing. All of the following items are subject to being prorated EXCEPT: A) broker commission.

B) prepaid rent.

C) property tax.

D) mortgage interest.

24) If property owners fail to pay their taxes in a timely fashion, this can create a first lien on the mortgaged property. In order to protect against this, lenders often require that borrowers add what fraction of their estimated tax bill to their required monthly mortgage payments?

A) 1/12 B) 1/6 C) 1/4 D) 1/2

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25) Recording documents in the public records informs anyone who may have a potential interest in a property of both the owner and lender. In so doing, it provides what is commonly referred to as ____________ of an interest in real property.

A) mutual assent B) constructive notice C) consideration D) simultaneous issue

26) The laws of some states require that real estate brokers provide buyers and sellers with a list of estimated closing costs before signing a contract for sale. At the closing, it is typically which of the following party’s responsibilities to pay the full premium for an owner’s title insurance policy?

A) buyer B) seller C) lender D) broker

27) At the closing, the buyer will be credited for a number of costs that have been paid upfront (or will be paid after closing) as well as a number of prorated expenses that account for the period of time during which the seller occupied the house. All of the following items detailed in the closing costs involve credits that are commonly passed on to the buyer EXCEPT: A) earnest money.

B) hazard insurance premiums.

C) property taxes.

D) mortgage interest.

28) When a borrower (the buyer) applies for a loan, the lender will provide him/her with which of the following forms that includes details pertaining to specific loan information and an estimate of expenses that the borrower is likely to incur at the closing?

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A) kickback agreement B) loan estimate C) ”Your Home Loan Toolkit” booklet D) certificate of occupancy

29) When the seller in a contract for sale fails to perform (e.g. breach of contract, nonperformance, or default), the buyer has a variety of remedies. One such remedy is to appeal to the court to force the defaulting seller to carry out the contract. This remedy is most commonly referred to as suing for: A) damages.

B) earnest.

C) recission.

D) specific performance.

30) Which of the following contract elements is an additional requirement that must be satisfied in a contract for sale of real estate that isn’t necessarily a part of other contracts?

A) competent parties B) consideration C) legal objective D) proper description of the property

31) Certain closing costs will be prorated to account for the period of time during which the seller occupied the house. If a transaction is scheduled to close on May 17 (136 days into a 365day year), calculate the amount that the buyer will be credited if the particular closing cost in question is estimated to be $1,000 for the entire year.

A) $182.19 B) $372.60 C) $624.66 D) $1000

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32) Since property taxes are paid in arrears, the buyer will be responsible for paying them after closing. Suppose that the closing date on the home for sale is February 28th of a leap year (e.g., 2012, 2016, etc.). How many calendar days would the seller be responsible for when calculating his/her share of the property tax owed for the year in which the home was sold?

A) 58 days B) 59 days C) 307 days D) 308 days

33) If a property transaction is scheduled to close on May 14th, calculate the individual tax responsibility for the buyer if the total tax owed at the end of the year is $5,000. For this problem, assume that we are dealing with a 365 day calendar year.

A) $0.00 B) $1,821.92 C) $3,178.08 D) $5,000.00

34) Since hazard insurance premiums are paid up-front, the buyer will have to reimburse (credit) the seller a portion of the premium at the closing. Suppose that the insurance policy’s coverage began on December 15th of the prior year and the property transaction is set to close on March 16th of a 365-day year. The premium paid originally by the seller was $250. If the coverage will expire as of the end of day December 14th in the current year, what is the dollar amount that the buyer must credit the seller?

A) $0.00 B) $62.33 C) $187.67 D) $250.00

35) Suppose that you decide to purchase a property that has annual property taxes of $2,427.22. If the closing occurred on March 13th, calculate your share (Buyer’s share) of the total property taxes. For this problem, assume that we are dealing with a 365 day calendar year.

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A) $482.26 B) $1990.17 C) $1,996.96 D) $2,479.22

36) Suppose that you just sold a property that has annual property taxes of $2,427.22. If the closing occurred on March 13th, calculate your share (Seller’s share) of the total property taxes.

For this problem, assume that we are dealing with a 365 day calendar year.

A) $482.26 B) $1990.17 C) $1,996.96 D) $2,479.22

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

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27) B 28) B 29) D 30) D 31) B 32) A 33) C 34) C 35) C 36) A Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) The possibility that actual outcomes will vary from what was expected when the asset was purchased is referred to as: A) risk.

B) opportunity cost.

C) yield.

D) instrinsic value.

2) If investors require a higher rate of return for undertaking more risk, the underlying assumption is that investors are: A) risk neutral.

B) risk averse.

C) risk taking.

D) hedging risk.

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3) Since investors prefer to have money now rather than later, money received next week, instead of today, is not worth as much to those receiving it, assuming the magnitude of the cash flow in each period is the same. The process for equating the value of future cash flows to an equivalent present value is referred to as: A) compounding.

B) discounting.

C) amortizing.

D) hedging.

4)

The process for computing the future value of an investment is referred to as: A) compounding.

B) discounting.

C) amortizing.

D) hedging.

5) When discussing time-value-of-money it is necessary to understand some key terminology. Which of the following terms refers to a fixed amount of money paid or received at the end of every recurring period (i.e. a series of equal lump sums)?

A) future value B) present value C) ordinary annuity D) annuity due

6) With compound interest, the investor earns interest on the principal amount invested plus interest on accumulated interest. Which of the following compounding frequencies would yield the investor the greatest ending balance assuming all else is equal?

A) daily B) monthly C) quarterly D) annually

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7) The frequency of cash flows and reinvestment can have a significant impact on both present value and future value calculations. Based on your understanding of these relationships, as we increase the frequency of discounting (compounding), which of the following relations would we expect to hold true, all else equal: A) lower present values (greater future values).

B) greater present values (greater future values).

C) greater present values (lower future values).

D) lower present values (lower future values).

8) Assuming all else the same, the ___________ of an annuity due will be _____________ that of an ordinary annuity with the same magnitude cash flows.

A) future value; greater than B) present value; equal to C) future value; equal to D) present value; less than

9) The internal rate of return (IRR) and the net present value (NPV) are tools that are widely used in real estate investment and finance decision making. An investor would most likely pursue an investment if which of the following circumstances was true?

A) The going-in IRR exceeds the investor’s required rate of return.

B) The going-in IRR is less than the investor’s required rate of return.

C) The going-in IRR exceeds the NPV. D) The going-in IRR is less than the NPV.

10) In the real estate appraisal business, the internal rate of return (IRR) is often referred to as the __________ because it measures return that includes both current and expected future property rental income, as well as the expected change in the asset’s price.

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A) current yield B) appreciation yield C) total yield D) historic yield

11) Which of the following statements best describes what is captured by the “going-in” IRR? A) the rate of return that is required by an investor on an investment of equivalent risk B) the rate of return that is realized by an investor on an investment over a specific investment horizon C) the calculated rate of return based on expected cash flows of an investment D) the rate of return on an investment relative to a risk-free benchmark

12) The rate that is used to discount expected future cash flows can be thought of as the return the investor is forgoing on an alternative investment of equal risk. In this framework, the discount rate is being thought of as which of the following?

A) net present value B) opportunity cost C) closing cost D) future value

13) The Real Estate Research Corporation (RERC) regularly surveys a sample of institutional investors and managers in order to gain insight into the required returns and risk adjustments used by industry professionals when making real estate acquisitions. Most of the properties that RERC examines are large, relatively new, located in major metropolitan areas and fully or substantially leased. These classifications of properties are commonly referred to as: A) investment grade properties.

B) speculative grade properties.

C) net-lease properties.

D) industrial properties.

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14) Uncertainty of cash flows can vary significantly across property types. Which of the following property types is often considered to have the most uncertain expected cash flows?

A) multifamily B) industrial C) office D) hospitality

15) You have just had a tenant sign a lease contract that guarantees you payments of $100,000 at the end of each year for the next five years. If you wish to determine the present value of these future cash flows (i.e. the value of this cash flow stream to you today), you would use which of the following time value of money processes?

A) compounding B) discounting C) amortizing D) aggregating

16) Which of the following terms refers to a fixed amount of money paid or received at the beginning of every recurring period (i.e. a series of equal lump sums)?

A) future value B) present value C) ordinary annuity D) annuity due

17) Suppose an investor deposits $2500 in an interest-bearing account at her local bank. The account pays 2.5% interest compounded annually. If the investor plans on withdrawing the original principal plus accumulated interest at the end of 7 years, what is the total amount that she should expect to receive assuming interest rates do not change?

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A) $2,971.71 B) $2,974.89 C) $3,532.43 D) $11,920.93

18) Suppose that a landlord is interested in renting out a two-bedroom apartment for $1000 a month for the next year. The landlord requires rent to be paid at the beginning of the month, at which point he will deposit the rental check into a local savings account. If the annual interest that the tenant can earn on this account is 5% and interest is compounded monthly, how much will the tenant have in his savings account at the end of the year?

A) $12,278.86 B) $12,330.01 C) $13,330.02 D) $15,917.13

19) An investor agreed to sell a warehouse 5 years from now to the tenant who currently rents the space. The tenant will continue to pay $20,000 rent at the end of each year including year five in which he will purchase the building for an additional $150,000. Assuming the investor's required rate of return is 10%, how much is this deal presently worth to the investor who was willing to sell?

A) $168,953.93 B) $241, 451.07 C) $363,678.50 D) $1,032,475.67

20) Assuming that an investor requires a 10% annual yield over the next 12 years, how much would she be willing to pay for the right to receive $20,000 at the end of year 12?

A) $6,053.91 B) $6,372.62 C) $62,768.57 D) $136,273.84

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21) Assume that an individual puts $10,000 into a savings account that pays 3% interest, with interest being compounded monthly. The individual plans to withdraw the balance in 5 years to buy a car. If he does not make any further deposits over this period, how much will the individual be able to put towards his purchase?

A) $10,125.63 B) $11,592.74 C) $11,616.17 D) $58,916.03

22) The purchase price of an income producing property today is $570,000. After analysis of the expected future cash flows, expected sales price, and expected yield, the investor determines that the future cash flows have a present value (PV) of $580,000. Taking into consideration the price of the property today, what is the net present value (NPV) of this investment opportunity, and should the investor take the deal?

A) $10,000; Yes B) $10,000; No C) -$10,000; Yes D) -$10,000; No

23) Suppose an investor is interested in purchasing the following income producing property at a current market price of $450,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1 = $40,000, Year 2 = $45,000, Year 3 = $50,000, Year 4 = $55,000. Assuming that the required rate of return is 12% and the estimated proceeds from selling the property at the end of year four is $500,000, what is the NPV of the project?

A) $8,829.96 B) $9,889.56 C) $428,113.65 D) $459,889.56

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24) Assume that an industrial building can be purchased for $1,500,000 today, is expected to yield cash flows of $80,000 for each of the next five years (with the cash flows occurring at the end of each year), and can be sold at the end of the fifth year for $1,625,000. Calculate the internal rate of return (IRR) for this transaction.

A) 3.14% B) 6.78% C) 9.20% D) 10.37%

25) Assume that a piece of land is currently valued at $50,000. If this piece of land is expected to appreciate at an annual rate of 5% per year for the next 20 years, how much will the land be worth 20 years from now?

A) $100,898.99 B) $112,633.09 C) $123,860.81 D) $132,664.89

26) An investor originally paid $22,000 for a vacant lot 12 years ago. If the investor is able to sell the lot today for $62,000, what would his annual rate of return be on this investment (rounded to the nearest percent)?

A) 5% B) 7% C) 9% D) 11%

27) An investor just purchased an office building for $100,000. He knows for certain that he can sell the building for $110,000 in 5 years. Approximately how much does he need to charge in annual rent in order to achieve a 15% annual return on the deal (rounded to the nearest hundred dollars)?

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A) $2,500 B) $8,000 C) $13,500 D) $20,500

28) Suppose a bank decides to make a mortgage loan to an individual so that they may purchase a home. The homeowner will pay the bank $1500 per month in mortgage payments for the next 30 years. The bank will collect the mortgage payments at the end of the month. What is this promised stream of cash flows worth to the bank today if they could reinvest the monthly income at an annualized rate of 5% for the entire investment horizon?

A) $23,058.68 B) $99,658.27 C) $279,422.43 D) $1,248,387.95

29) Suppose you have found a tenant who wishes to rent out your vacation home for the next twelve months. You are charging $800 per month in rent. You will collect the first rent payment today and then on the 1st of the month each month thereafter. What is the value of this investment opportunity to you today if you could reinvest your income at an annual rate of 3% with interest compounded on a monthly basis?

A) $7,963.20 B) $8,202.10 C) $9,445.80 D) $9,469.42

30) Suppose that a property can generate cash flows of $10,000 per year for eight years and can sell for $80,000 at the end of the investment period. Assuming a discount rate of 10%, what is the present value of this property (Assume end of period cash flows in your calculation)?

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A) $117,320 B) $160,000 C) $133,349 D) $90,670

31) Suppose that an industrial building can be purchased today for $2,500,000. If it is expected to produce cash flows of $180,000 for each of the next five years (assume CFs are received at the end of each year) and can be sold at the end of the fifth year for $2,800,000, what is the internal rate of return (IRR) on this investment?

A) 0.09% B) 4.57% C) 9.20% D) 10.37%

32) Upon starting his first job after graduation, Jon has completed the necessary paperwork to set up direct deposit of his paycheck into his savings account. After taxes, medical benefits, and retirement account contributions have been taken out of John’s gross salary, he is left with a direct deposit of $4000 at the end of each month. If John started with no other savings in his account, how much will John have in his savings account at the end of 12 months if he is able to earn an annual interest rate of 3%, with interest being compounded monthly?

A) $48,665.53 B) $48,787.19 C) $56,768.12 D) $58,471.16

33) Suppose you are starting a Ph.D. program with only $1,000 in your savings account. The university has agreed to waive your tuition, cover all of your living expenses, and pay you an additional stipend of $2,000 at the beginning of each month, as long as you teach one course per semester over the course of five years. If your savings account is able to earn 5.5% per year for the five years that you will be in this program, how much will you have accumulated in your savings account by the end of the program if interest is compounded on a monthly basis?

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A) $136,445.94 B) $137,708.75 C) $139, 077.35 D) $139,708.76

34) Suppose your personal financial goal is to retire with a million dollars in your savings account. How much must you deposit monthly in an account paying 5% a year (with interest being compounded monthly and your deposits occurring at the end of the month), to accumulate $1,000,000 by your 65th birthday if you begin your deposits on your 22nd birthday? (Note: Assume that you started with no savings in the account prior to your first deposit at age 22 and you do not make a deposit on your 65th birthday.)

A) $552.13 B) $701.90 C) $21,282.95 D) $186,354.63

35) A property owner has set up a contract in which he agrees to sell a warehouse 5 years from now to the tenant who currently leases the space. The tenant has agreed to continue to pay $20,000 in rent at the end of each year, including year five, at which time he will purchase the building for an additional $1,500,000. Assuming the required rate of return on a similar investment is 10% (annual), how much is this deal presently worth to the original owner of the property?

A) $1,007,197.20 B) $1,014,779.29 C) $2,281,452.80 D) $2,293,663.00

36) Suppose you own a house that you are renting out to a group of college students for the 10 month academic year. You are charging $1000 per month in rent. You will collect the first rent payment today and then on the 1st of the month each month thereafter. What is the value of this investment opportunity to you today if you could reinvest your income at an annualized rate of 6%?

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A) $9,677.77 B) $9,730.41 C) $9,779.06 D) $11,677.03

37) Suppose an investor is interested in purchasing the following income producing property at a current market price of $490,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1 = $48,000, Year 2 = $49,440, Year 3 = $50,923, Year 4 = $52,451. Assuming that the required rate of return is 14% and the estimated proceeds from selling the property at the end of year four is $560,000, what is the NPV of the project?

A) -$12,860.53 B) $145,574.52 C) $331,564.96 D) $477,139.47

38) Suppose an investor deposits $5,000 in an interest-bearing account at her local bank. The account pays 2.5% (annual) with interest compounded monthly. If the investor plans on withdrawing the original principal plus accumulated interest at the end of 10 years, what is the total amount that she should expect to receive assuming interest rates do not change?

A) $5,105.15 B) $6,400.42 C) $6,418.46 D) $96,790.75

39) Suppose an investor has the opportunity to make an investment that promises to pay her $100,000 5 years from now. How much should this investor be willing to pay today for this investment opportunity if he could otherwise invest his money in an interest bearing account that yields 5% (annual) and compounds interest on a monthly basis?

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A) $77,920.54 B) $78,352.62 C) $97,942.46 D) $432,947.67

40) Suppose an investor is interested in purchasing the following income producing property at a current market price of $2,500,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1 = $100,000, Year 2 = $150,000, Year 3 = $200,000, Year 4 = $250,000. If the estimated proceeds from selling the property at the end of year four is $3,000,000, what is the internal rate of return (IRR) of the project?

A) -33.93% B) 5.72% C) 8.99% D) 10.99%

41) Suppose a bank decides to make a mortgage loan to an individual so that they may purchase a home. The homeowner will pay the bank $1,500 per month in mortgage payments for the next 30 years. The bank will collect the mortgage payments at the end of the month. If the borrower does not default on their loan, how much money will the bank have accumulated if they could reinvest the monthly income at an annualized rate of 5% for the entire investment horizon?

A) $23,058.68 B) $99,658.27 C) $279,422.43 D) $1,248,387.95

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

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27) C 28) C 29) D 30) D 31) C 32) A 33) D 34) A 35) A 36) C 37) A 38) C 39) A 40) D 41) D Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) The monthly mortgage payment divided by the loan amount is commonly referred to as the: A) loan balance.

B) effective borrowing cost.

C) lender’s yield.

D) monthly loan constant.

2) The internal rate of return on a mortgage loan calculated from the lender’s perspective is more commonly referred to as the:

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A) discount point.

B) effective borrowing cost.

C) lender’s yield.

D) loan constant.

3) The internal rate of return on a mortgage loan calculated from the borrower’s perspective is more commonly referred to as: A) discount point.

B) effective borrowing cost.

C) lender’s yield.

D) loan constant.

4) Included in the calculation of the effective borrowing cost of a mortgage loan are certain closing costs, which may consist of all of the following EXCEPT: A) title insurance.

B) mortgage insurance.

C) recording fees.

D) earnest money.

5) Required by the Truth-in-Lending Act, the annual percentage rate (APR) is reported by the lender to the borrower on virtually all U.S. home mortgage loans. The APR accounts for all of the following EXCEPT: A) all finance charges in connection with the loan, such as discount points, origination fees, and underwriting fees.

B) all compensation to the originating brokers if one was used by the borrower.

C) any prepayment of principal to be made on the loan.

D) premiums for required forms of insurance.

6) When lenders charge discount points (prepaid interest) on a loan, what impact does this have on the loan’s yield?

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A) The yield on the loan will increase.

B) The yield on the loan will decrease.

C) The yield on the loan will be unaffected.

D) The yield on the loan automatically becomes zero.

7) For the purposes of estimating the effective borrowing cost (EBC), only those up-front expenses associated with obtaining the mortgage should be included, not the settlement costs associated with obtaining ownership of the property. With this in mind, which of the following costs should not be included in one’s calculation of EBC? A) discount points B) loan origination fees C) appraisal fee D) buyer’s title insurance

8) When fully amortizing loans call for equal periodic payments over the life of the loan they are known as: A) level-payment mortgages.

B) adjustable-rate mortgages.

C) interest-only mortgages.

D) early-payment mortgages.

9) While a variety of loan terms are available in a lender’s mortgage menu, the most common loan term on a level-payment mortgage is: A) 7 years.

B) 15 years.

C) 30 years.

D) 40 years.

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10) Recently, 15-year mortgages have increased in popularity amongst both borrowers and lenders. Which of the following groups of borrowers would typically be the least interested in a 15-year mortgage?

A) mature households with minimal financial constraints B) first-time homebuyers C) homeowners who are refinancing to obtain a lower rate than is available on a comparable 30-year mortgage D) homeowners who are interested in selling their property within five years

11) Assume that a borrower has a choice between two comparable fixed-rate mortgage loans with the same interest rate, but different mortgage terms, one being a 30-year mortgage and the other a 15-year mortgage. Under financially unconstrained circumstances, which of the following statements best describes the borrower’s preference?

A) The borrower would prefer the 30-year mortgage.

B) The borrower would prefer the 15-year mortgage.

C) The borrower would be indifferent between the two mortgages.

D) The borrower is unable to compare mortgage loans of two different maturities.

12) Partially amortizing mortgage loans require periodic payments of principal, but are not paid off completely over the loan’s term to maturity. Instead, the balance of the principal amount is paid at maturity in what is commonly referred to as a: A) balloon payment.

B) early payment.

C) up-front payment.

D) payment cap.

13) With the recent popularity of adjustable-rate mortgages (ARM), lenders have begun to offer ARMs with different adjustment periods. Which of the following ARM choices will most likely have the highest initial rate?

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A) three-year-one-year ARM B) five-year-one-year ARM C) seven-year-one-year ARM D) ten-year-one-year ARM

14) In considering a 3/1 adjustable-rate mortgage (ARM), the interest rate will be fixed for how many years?

A) one year B) two years C) three years D) four years

15) One reason why adjustable-rate mortgages (ARMs) have become popular has to do with the impact that they have on the interest rate risk that is borne by the parties involved. If interest rates were to rise on a level-payment mortgage (LPM), the interest rate risk of the loan would typically be borne by: A) the borrower only.

B) the lender only.

C) both the borrower and lender.

D) neither the borrower nor the lender.

16) The initial short-term introductory rate offered on adjustable rate mortgages (ARMs) is more commonly referred to as a(n): A) margin rate.

B) teaser rate.

C) index rate.

D) discount rate.

17) Which of the following statements best describes the relation between interest rates offered on comparable fixed-rate and adjustable rate mortgage (ARM) loans?

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A) ARM interest rates are typically greater than those on fixed-rate mortgages since interest rate risk is borne by both borrower and lender in an ARM. B) ARM interest rates are typically less than those on fixed-rate mortgages since interest rate risk is borne by both borrower and lender in an ARM. C) ARM interest rates are typically greater than those on fixed-rate mortgages since interest rate risk is borne solely by the lender in an ARM. D) ARM interest rates are typically less than those on fixed-rate mortgages since interest rate risk is borne solely by the borrower in an ARM.

18) Which of the following statements best describes the impact of a rate cap on an adjustable rate mortgage (ARM)?

A) A rate cap increases the overall level of interest rate risk exposure on the mortgage loan for both borrower and lender.

B) A rate cap decreases the overall level of interest rate risk exposure on the mortgage loan for both borrower and lender.

C) A rate cap increases the proportion of interest rate risk borne by the borrower relative to the lender.

D) A rate cap decreases the degree of interest rate risk borne by the borrower relative to the lender.

19) Which of the following pieces of legislation established the requirement for a lender to report the annual percentage rate (APR) on a mortgage loan to the borrower?

A) Equal Credit Opportunity Act (ECOA) B) Truth-in-Lending Act (TILA) C) Real Estate Settlement Procedures Act (RESPA) D) Home Ownership and Equity Protection Act (HOEPA)

20)

The APR can be a controversial measure of borrowing cost because it tends to:

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A) overstate the true borrowing cost by assuming we hold mortgage until maturity.

B) understate the true borrowing cost by assuming we hold mortgage until maturity.

C) overstate the true borrowing cost by assuming we do not hold mortgage until maturity.

D) understate the true borrowing cost by assuming we do not hold mortgage until maturity.

21) Given the following information on a fixed-rate fully amortizing loan, determine the maximum amount that the lender will be willing to provide to the borrower.

Loan Term: 30 years Monthly Payment: $800 Interest Rate: 6% A) $6,707 B) $9,295.15 C) $13,333 D) $133,433

22) Given the following information on a 30-year fixed-payment fully-amortizing loan, determine the remaining balance that the borrower has at the end of seven years.

Interest Rate: 7% Monthly Payment: $1,200 A) $17,143 B) $79,509 C) $164,402 D) $180,369

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23) Given the following information on an interest-only mortgage, calculate the monthly mortgage payment.

Loan amount: $56,000 Term: 15 years Interest Rate: 7.5% A) $169.13 B) $350 C) $519.13 D) $4,200

24) Given the following information, calculate the balloon payment for a partially amortized mortgage.

Loan amount: $84,000 Term to maturity: 7 years Amortization Term: 30 years Interest rate: 4.5% Monthly Payment: $425.62 A) $9,458 B) $30,620 C) $73,102 D) $84,000

25) Given the following information about a fully amortizing loan, calculate the lender’s yield (rounded to the nearest tenth of a percent).

Loan amount: $166,950 Term: 30 years Interest rate: 8% Monthly Payment: $1,225.00 Discount points: 2

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A) 7.7% B) 8.0% C) 8.2 % D) 10.0 %

26) Given the following information, calculate the effective borrowing cost (rounded to the nearest tenth of a percent).

Loan amount: $166,950 Term: 30 years Interest rate: 8% Monthly Payment: $1,225.00 Discount points: 2 Other Closing Expenses: $3,611 A) 7.7% B) 8.2% C) 8.5% D) 9.1%

27) Suppose a potential home buyer is interested in taking a $500,000 mortgage loan that has a term of 30 years and a fixed mortgage rate of 5.25%. What is the monthly mortgage payment that the homeowner would need to make if this loan is fully amortizing?

A) $552.50 B) $2,761.02 C) $17,820.72 D) $33,458.47

28) You have taken out a $350,000, 3/1 ARM. The initial rate of 6.0% (annual) is locked in for 3 years. Calculate the outstanding balance on the loan after 3 years. The interest rate after the initial lock period is 6.5%. (Note: The term on this 3/1 ARM is 30 years.)

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A) $2,098.43 B) $2,183.95 C) $336,294.25 D) $347,901.57

29) You have taken out a $300,000, 5/1 ARM. The initial rate of 5.4% (annual) is locked in for 5 years. Calculate the payment after recasting the loan (i.e., after the reset) assuming the interest rate after the initial lock period is 8.0%. (Note: The term on this 5/1 ARM is 30 years.)

A) $1,684.59 B) $1,784.79 C) $1,887.75 D) $2,138.02

30) You have taken out a $225,000, 3/1 ARM. The initial rate of 5.8% (annual) is locked in for 3 years and is expected to increase to 6.5% at the end of the lock period. Calculate the initial payment on the loan. (Note: The term on this 3/1 ARM is 30 years.)

A) $1,320.19 B) $1,422.15 C) $1,874.45 D) $1959.99

31)

Given the following information, calculate the Effective Borrowing Cost (EBC).

Loan amount: $175,000 Term: 30 years Interest rate: 7% Payment: $1,164.28 Discount points: 1 point Origination fee: $3,250 Assume the loan is held until the end of year 10.

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A) 0.6% B) 3.8% C) 7.0% D) 7.4%

32) Suppose you have taken out a $200,000 fully-amortizing fixed rate mortgage loan that has a term of 15 years and an interest rate of 4.25%. In month 2 of the mortgage, how much of the monthly mortgage payment does the principal repayment portion consist of?

A) $705.51 B) $708.33 C) $796.22 D) $799.04

33) Suppose you have taken out a $125,000 fully-amortizing fixed rate mortgage loan that has a term of 15 years and an interest rate of 6%. After your first mortgage payment, how much of the original loan balance is remaining?

A) $1,054.82 B) $120,603.78 C) $124,570.18 D) $124,875.56

34) Assume you have taken out a partially amortizing loan for $325,000 that has a term of 7 years, but amortizes over 30 years. Calculate the balloon payment at maturity (Year 7) if the interest rate on this loan is 4.5%.

A) $1,646.73 B) $118,468.21 C) $282,835.42 D) $324,572.02

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35) Let’s assume that you have just taken out a mortgage loan for $200,000 with an origination fee of 2 points due upfront. The mortgage term is 30 years and the mortgage rate is fixed at 4%. What is the cost of the origination fee in dollar terms?

A) $400.00 B) $954.83 C) $4000.00 D) $4954.83

36) You have taken out a $350,000, 3/1 ARM. The initial rate of 6.0% (annual) is locked in for 3 years. Determine the owner’s equity in the property after 3 years if the market value of the property at the end of year 3 is $400,000. The interest rate after the initial lock period is 6.5%.

(Note: The term on this 3/1 ARM is 30 years.)

A) $13,705.75 B) $50,000.00 C) $63,705.75 D) $336,294.25

37) Given the following information on a 30-year fixed-payment fully-amortizing loan, determine the owner’s equity in the property after 7 years if the market value of the property is $240,000 at the end of year 7.

Interest Rate: 7% Monthly Payment: $1,200 A) $15,967.33 B) $59,630.92 C) $75,598.25 D) $164,401.75

38) You have taken out a $100,000, one-year ARM. The teaser rate in the first year is 4.5% (annual). The index interest rate after the first year is 3.25% and the margin is 2.75%. (Note: The term on this ARM is 30 years.) There is also a periodic (annual) rate cap of 1.00%. Given this information, determine the monthly mortgage payment you would be scheduled to make in month 1 of the mortgage loan’s term.

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A) $321.64 B) $506.69 C) $567.79 D) $599.55

39) You have taken out a $100,000, one-year ARM. The teaser rate in the first year is 4.5% (annual). The index interest rate after the first year is 3.25% and the margin is 2.75%. (Note: The term on this ARM is 30 years.) There is also a periodic (annual) rate cap of 1.00%. Given this information, determine the monthly mortgage payment you would be scheduled to make in month 13 of the mortgage loan’s term.

A) $321.64 B) $506.69 C) $566.26 D) $597.21

40) You have taken out a $300,000, one-year ARM. The teaser rate in the first year is 5.5% (annual). The index interest rate after the first year is 4.00% and the margin is 2.25%. (Note: The term on this ARM is 30 years.) There is also a periodic (annual) rate cap of 1.00%. Given this information, determine the monthly mortgage payment you would be scheduled to make in month 13 of the mortgage loan’s term.

A) $980.08 B) $1,703.37 C) $1,843.88 D) $1,891.81

41) Suppose you have taken out a $400,000 fully-amortizing fixed rate mortgage loan that has a term of 15 years and an interest rate of 3.75%. In month 1 of the mortgage, how much of the monthly mortgage payment does the interest portion consist of?

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A) $9.09 B) $1,250.00 C) $1,658.89 D) $2,908.89

42) Assume you have taken out a partially amortizing loan for $1,000,000 that has a term of 7 years, but amortizes over 20 years. Calculate the balloon payment if the interest rate on this loan is 9%.

A) $8,997 B) $559,199 C) $825,679 D) $936,405

43) Suppose you have taken out a $325,000 fully-amortizing fixed rate mortgage loan that has a term of 30 years and an interest rate of 5.5%. In month 10 of the mortgage, how much of the monthly mortgage payment does the interest portion consist of?

A) $370.68 B) $1,474.64 C) $1,489.58 D) $1,845.31

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

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27) B 28) C 29) D 30) A 31) D 32) D Payment = $1,504.56 Payment

Interest

Principle

0 1 2

Balance $200,000.00

$1,504.56 $1,504.56

$708.33 $705.51

$796.22 $799.04

$199,203.78 $198,404.73

33) C 34) C 35) C 36) C 37) C 38) B 39) C 40) C 41) B 42) C 43) B Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) One of the main differences between residential mortgage loans and permanent financing of commercial real estate lies in the allocation of liability in the case of default. In commercial real estate, a “bankruptcy remote” special-purpose entity is created that shields the actual borrower from personal liability. When a lender cannot lay claim to the personal assets of the defaulted borrower, this type of loan is commonly referred to as a:

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A) nonrecourse loan.

B) mini-perm loan.

C) partially amortizing loan.

D) interest-only loan.

2) In recent years, lenders have been unwilling to relieve borrowers from personal liability in the event of fraud, environmental problems, or unpaid property tax obligations. Therefore, some lenders include a clause that pierces the single-purpose borrowing entity to hold the actual borrower liable in such instances. This clause is commonly referred to as a: A) habendum clause.

B) lockout provision.

C) defeasance.

D) “bad boy carve-out” clause.

3) Which of the following types of loans is the most common instrument used to finance the acquisition of existing commercial property?

A) fixed-rate balloon mortgage loans B) floating-rate mortgage loans C) mezzanine loans D) construction loans

4) Some commercial mortgages have adjustable, or floating, interest rates. The index rate to which the contract rate is tied is typically which of the following for commercial mortgages?

A) the yield on a constant maturity Treasury security of the same term B) the cost of funds index (COFI) C) the London Interbank Offer Rate (LIBOR) D) the interest rate on a comparable maturity level-payment mortgage

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5) While balloon mortgage loan payments are typically based on a 30-year amortization schedule, the loan actually matures in either 3, 5, 7, or 10 years. Of the following, which is the primary risk that a lender reduces their exposure to through the relatively short loan term on a balloon mortgage?

A) default risk B) interest rate risk C) liquidity risk D) financial risk

6) In contrast to residential mortgage loans, most fixed-rate commercial mortgages do not allow borrowers to freely prepay the principal on their loan. Which of the following prepayment penalties ties the penalty that borrowers pay to how far interest rates have declined since origination?

A) lockout provisions B) yield-maintenance agreements C) defeasance D) curtailment

7) If mortgage rates decline significantly, borrowers may decide to prepay the principal on their loan even if they face prepayment penalties. One way that lenders protect themselves from prepayments in such circumstances is by requiring the borrower who prepays to purchase for the lender a set of U.S. Treasury securities whose coupon payments replicate the cash flows the lender will lose as a result of the early retirement of the mortgage. This process is referred to as: A) lockout.

B) yield-maintenance.

C) defeasance.

D) curtailment.

8) While floating rate mortgage loans may offer lower interest rates to borrowers than comparable fixed-payment mortgages, floating-rate loans may increase a lender’s exposure to which of the following risks since borrowers may not be able to continue to service the debt if payments on the loan increase significantly?

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A) default risk B) interest rate risk C) liquidity risk D) pipeline risk

9) The yields on commercial mortgages have been approximately 2 percent higher, on average, than the yields on comparable maturity treasury securities over the past 20 years. Often considered the signature risk of commercial mortgage lending, this spread primarily represents: A) default risk.

B) interest rate risk.

C) pipeline risk.

D) fallout risk.

10) There are a number of alternatives when it comes to the capital structure for acquisitions of commercial real estate. Through which of the following lending relationships does the lender have the right to foreclose on the equity of the borrower’s company in the case of default?

A) second mortgage loan B) mezzanine loan C) mini-perm loan D) construction loan

11)

An interest-only balloon mortgage loan is commonly referred to as a(n): A) miniperm loan B) mezzanine loan C) land acquisition loan D) bullet loan

12) In order to better understand a borrower’s probability of default, lenders have a number of tools at their disposal. The ratio that measures the percentage of the price (or value) of a property that is encumbered by the first mortgage is referred to as the: Version 1

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A) debt coverage ratio (DCR).

B) loan-to-value ratio (LTV).

C) break-even ratio (BER).

D) price-earnings ratio (PE).

13) Which of the following ratios measures the extent to which a property’s net operating income (NOI) can decline from expectations before it is insufficient to service the mortgage debt?

A) debt coverage ratio (DCR) B) loan-to-value ratio (LTV) C) break-even ratio (BER) D) debt-yield ratio

14) The use of financial leverage by real estate investors can be a double-edged sword. All of the following statements regarding the use of financial leverage by real estate investors are true EXCEPT: A) The use of financial leverage by real estate investors mitigates the impact that limited financial resources would otherwise have on their pursuit of investment opportunities.

B) The use of financial leverage by real estate investors will increase the internal rate of return (IRR) on equity as long as the cost of borrowing is less than the unlevered IRR. C) The use of financial leverage reduces the real estate investor’s exposure to default risk.

D) The use of financial leverage by real estate investors makes the realized return on equity more sensitive to changes in rental rates and resale values.

15) Although nonrecourse loans dominate the commercial mortgage lending practices of pension funds, life insurance companies, and commercial mortgage-backed security (CMBS) originators, banks are likely to require some form of a guarantee by the organizer/sponsor of the investment opportunity to make the lender whole in the event the lender suffers a loss on the loan. This protection to the lender is more commonly referred to as a:

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A) credit enhancement.

B) property externality.

C) joint venture.

D) mezzanine loan.

16) Relative to residential loans, the underwriting process for commercial loans is more complicated. The commercial loan underwriting process focuses first on which of the following?

A) individual borrower’s credit quality B) income producing potential of the collateral property C) individual borrower’s wages D) individual borrower’s personal assets

17) Prospective borrowers often submit loan requests directly to lenders. However, commercial loan requests can also be submitted through another channel in which a permanent lender agrees to purchase loans or consider loan requests from a mortgage banker or broker. This type of business relationship is more commonly referred to as a(n): A) installment sale.

B) joint venture.

C) correspondent relationship.

D) sale-leaseback.

18) Once a loan application is signed, the lender begins a process that typically includes ordering the fee appraisal, the title report, and a number of third party inspection, compliance, and engineering reports in an attempt to make sure the potential borrower did not misrepresent the property in any way in the original loan submission package. This process is more commonly referred to as: A) due diligence.

B) loan submission.

C) loan development.

D) defeasance.

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19) Which of the following terms refers to a written agreement that binds the lender to make a loan to the borrower provided the borrower satisfies the terms and conditions of the agreement?

A) loan application B) loan commitment C) loan underwriting D) loan document

20) Different financing requirements usually are involved in the various phases of a property’s life. Which of the following types of loans is used to finance improvements to the land, such as sewers, streets and utilities?

A) land acquisition loans B) land development loans C) construction loans D) bridge loans

21) Land acquisition, development, and construction loans used by developers differ significantly from the “permanent” mortgages that traditionally are used to finance the purchase of commercial properties. All of the statements listed below are true regarding land acquisition, development, and construction loans EXCEPT: A) developers can never be held personally liable for such loans.

B) these loans have floating interest rates tied to short-term interest rate indices.

C) these loans are interest-only loans.

D) these loans can be prepaid at any time without penalty.

22) If the mortgage loan is going to be packaged with similar loans and then resold to investors as part of a commercial mortgage-backed security, the originating lender may rely more heavily on examining which of the following ratios in order to determine the maximum amount they are willing to lend to the borrower? (Note: This ratio indicates the cash-on-cash return the lender would earn on its invested capital if it had to foreclose on the property immediately after originating the loan.)

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A) debt coverage ratio B) debt yield ratio C) debt service ratio D) equity dividend ratio

23) The risk that a property’s net operating income (NOI) will be less than its debt service is often referred to as: A) financial risk.

B) interest rate risk.

C) reinvestment risk.

D) prepayment risk.

24) A commercial real estate loan may take 90 days from the signing of the purchase and sale contract until loan closing. Therefore, there is the possibility for interest rates to fluctuate during this period. In some cases, the lender may offer the borrower the opportunity to “lock in” the interest rate on the loan. To protect against exposure to rate increases during this period, the borrower is often willing to pay a nonrefundable fee as part of what is more commonly known as a: A) lockout provision.

B) rate lock agreement.

C) floating rate agreement.

D) yield maintenance provision.

25) The use of a mezzanine loan in the purchase of a commercial property has all of the following impacts on the borrower EXCEPT:

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A) allows the borrower to increase their financial leverage in the purchase of the property.

B) increases the borrower’s expected first year return on equity.

C) mitigates the risk of financing for the borrower.

D) requires the borrower to pledge an equity interest in their company (e.g., LLC) as collateral for the loan rather than pledging the property.

26) The note is the document used to create a legal debt. In most states, the note creates personal liability for residential borrowers. When mortgage lenders have access to other borrower assets in situations where the foreclosure sale price is less than the total amount of the loan outstanding, we commonly refer to this type of loan as a: A) nonrecourse loan.

B) miniperm loan.

C) partially amortizing loan.

D) recourse loan.

27) The flexibility to prepay the principal on a mortgage loan differs significantly between commercial and residential mortgages. Which of the following clauses prohibits prepayment of the mortgage loan for a specified period of time after its origination?

A) lockout provisions B) yield maintenance agreements C) defeasance D) curtailment

28) Based on your understanding of the concept of a lockout provision, lenders are able to reduce their exposure to which of the following risks through its use?

A) default risk B) reinvestment risk C) liquidity risk D) interest rate risk

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29) Commercial banks most commonly provide floating rate loans. However, borrowers who prefer a fixed rate can obtain an agreement that exchanges floating rate payments for a fixed rate schedule. This type of agreement is more commonly referred to as a(n): A) curtailment.

B) defeasance.

C) foreclosure.

D) interest rate swap.

30) When a lender receives a specified portion of a property’s net operating income and/or net sale proceeds as part of the loan agreement, this loan type is more commonly referred to as a: A) miniperm loan.

B) mezzanine loan.

C) participation loan.

D) bullet loan.

31) Some investors obtain more than one loan when acquiring properties, thereby substituting more debt financing for equity financing. A traditional second mortgage is secured by: A) an equity interest in their company (e.g., LLC).

B) the borrower’s pledge of the property as collateral.

C) a set of US Treasury securities whose coupon payments replace the mortgage cash flows.

D) a balloon payment made by a government sponsored enterprise.

32) Construction loans are used to finance the costs associated with erecting the building or buildings on a site. All of the following would be typical of a construction loan EXCEPT: A) LTV ratios above 90 percent.

B) preleases with anchor tenants.

C) relatively short maturity length of one to three years that may also allow for time to construct and lease up the project.

D) personal liability.

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33) Developers may obtain a single, short-term mortgage loan from an interim lender that provides financing for the construction period, the lease-up period, and for several years beyond the lease-up stage. This loan type is more commonly referred to as a: A) miniperm loan.

B) mezzanine loan.

C) participation loan.

D) bullet loan.

34) Which of the following loan types is used to finance the costs associated with erecting the building (i.e., “going vertical”)?

A) land acquisition loan B) land development loan C) construction loan D) miniperm loan

35) Which of the following types of loans are often used to provide short-term financing for “transitional” properties (e.g., properties that are currently experiencing heightened vacancies, or that need to be redeveloped or renovated before they can be stabilized)?

A) land acquisition loan B) land development loan C) construction loan D) bridge loan

36) Given the following information, calculate the debt coverage ratio of this commercial loan.

Estimated net operating income (NOI) in the first year: $150,000 Debt service in the first year: $100,000 Loan amount: $1,000,000 Purchase price: $1,300,000

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A) 0.15 B) 0.67 C) 1.30 D) 1.50

37) Given the following information, calculate the loan-to-value ratio of this commercial loan.

Estimated net operating income in the first year: $150,000 Debt service in the first year: $100,000 Loan amount: $1,000,000 Purchase price: $1,300,000 A) 0.08 B) 0.77 C) 1.30 D) 1.75

38) Given the following information, calculate the debt yield ratio on the following commercial property.

Estimated Net Operating Income in the first year: $2,500,000 Debt service in the first year: $960,000 Loan amount: $20,000,000 Purchase price: $27,300,000 A) 4.8% B) 12.5% C) 68.6% D) 75.2%

39) Suppose you are considering the purchase of an apartment building that has 12 units that can be rented out at $1,050 per month. You have estimated operating expenses and expected vacancy and collection losses for the first year to be $35,700 and $30,240, respectively. You also have estimated that you will be able to generate an additional $3,840 in the first year from garage rentals on the property. If the expected purchase price of the property is $1,100,000 and you are planning on making a 10% down payment, calculate the debt yield ratio.

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A) 8.10% B) 8.61% C) 9.00% D) 12.05%

40) Assume you have taken out a balloon mortgage loan for $2,500,000 to finance the purchase of a commercial property. The loan has a term of 5 years, but amortizes over 25 years.

Calculate the balloon payment at maturity (Year 5) if the interest rate on this loan is 4.5%.

A) $5,637.99 B) $13,895.82 C) $2,196,447.59 D) $2,495,479.19

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

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27) A 28) B 29) D 30) C 31) B 32) A 33) A 34) A 35) D 36) D 37) B 38) B 39) C 40) C Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) The $12.6 trillion total market value of commercial real estate can be broken into four quadrants. Which of the following sectors of the commercial real estate market currently accounts for the largest proportion of market value?

A) public equity B) privately held equity C) publicly traded mortgage debt D) privately held mortgage debt

2) In contrast to public markets, private markets are characterized by individually negotiated transactions that take place without the aid of a centralized market. Therefore, private markets will generally have:

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A) high transaction costs and high liquidity.

B) high transaction costs and low liquidity.

C) low transaction costs and high liquidity.

D) low transaction costs and low liquidity.

3) There are a set of restrictive conditions that REITs must satisfy on an ongoing basis in order to maintain their special tax status. All of the following statements regarding the main restrictions are true EXCEPT: A) at least 100 investors must own a REIT’s shares.

B) no five investors can own more than 50 percent of a REIT’s shares.

C) at least 75 percent of the value of a REIT’s assets must consist of real estate assets.

D) a REIT must distribute at least 75% of its taxable income to shareholders in the form of dividends.

4) There are two major types of REITs: Equity REITs and Mortgage REITs. Each differs in terms of what they invest in. Which of the following choices best describes the investment focus of an Equity REIT? A) invests a significant percentage of their assets in both properties and mortgages B) invests primarily in and operates commercial properties C) purchases mortgage obligations D) purchases ownership interests in shares of pension funds and life insurance companies

5) Though difficult to accurately measure, the market value of U.S. real estate held by nonreal estate corporations is estimated to exceed $12.5 trillion. All of the following are examples of noninvestible commercial real estate EXCEPT: A) medical office buildings owned by the hospital.

B) branch offices owned by the bank.

C) plant and equipment owned by steel corporations.

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

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6) When fund managers collect contributions from multiple sources and “commingle” them to purchase properties, this is referred to as the use of commingled real estate funds. Which of the following institutional investors utilize commingled real estate funds for approximately onehalf of their investments in real estate?

A) investment banks B) life insurance companies C) real estate advisory firms D) pension funds

7) At the end of 2018, commercial banks and other financial institutions collectively owned $49 billion in commercial real estate equity. The vast majority of these holding are the result of which of the following types of investment by these institutions?

A) direct equity investment through private market purchases B) indirect investment through real estate securities C) commingled real estate funds D) real estate obtained as a result of borrower default and foreclosure

8) The choice of ownership form for pooled equity investments depends heavily on federal tax considerations. Which of the following ownership structures suffers from the major disadvantage of double taxation?

A) C Corporation B) Subchapter S Corporation C) General Partnership D) Limited Liability Company

9) Ownership forms for pooled equity investment can differ in terms of how the entity’s cash flows are distributed to its investors. Which of the following ownership structures requires cash flows to be allocated to each shareholder in proportion to his or her ownership of the entity, thereby preventing special allocations to multiple classes of investors?

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A) Subchapter S Corporation B) General Partnership C) Limited Partnership D) Limited Liability Company

10) The choice of ownership form for pooled equity investments can also depend on the desire to avoid personal liability. Which of the following ownership structures suffers from the major disadvantage of unlimited liability for all investors?

A) C Corporation B) Subchapter S Corporation C) General Partnership D) Limited Partnership

11) Of the $4.71 trillion in outstanding mortgage debt in the U.S., approximately $3.66 trillion is privately held by institutional and individual investors. Which of the following investor groups is the largest single source of private mortgage funds?

A) individual investors B) life insurance companies C) government Sponsored Enterprises D) commercial banks

12) Short-term transitional and development loans are typically provided by which of the following types of lenders?

A) mortgage REITs B) private, noninstitutional lenders C) government sponsored enterprises D) commercial banks

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13) Commercial mortgage backed securities (CMBS) can be classified based on whether or not they are issued or backed by a government agency. CMBS that are not issued or backed by a government agency or more commonly referred to as: A) public, nonlisted.

B) private label.

C) private equity.

D) commingled funds.

14) Commercial mortgage backed securities (CMBS) backed by government-sponsored enterprises (GSEs) consist entirely of mortgages from which of the following property types?

A) multifamily B) office C) industrial D) retail

15) In most small to medium private real estate deals, syndicators play important roles within the origination, operation, and completion phases of a real estate syndicate’s life. All of the following are responsibilities of the syndicator in the operation phase of a syndicate’s lifeEXCEPT: A) manage the syndication.

B) manage properties.

C) raise additional investment capital if required.

D) prepare the properties for sale.

16) All of the following are responsibilities of the syndicator in the origination phase of a syndicate’s life EXCEPT: A) develop the concept for the syndication.

B) organize the legal entity.

C) acquire or obtain control of the real estate.

D) raise additional investment capital.

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17) The syndication agreement generally creates a principal/agent relationship in which the syndicator (agent) is empowered to act on behalf of the investors (principals). In most principal/agent relationships, there is the concern that the agent will act in the agent’s best interest, not in the best interests of the principal. This issue is more commonly referred to as: A) adverse selection.

B) moral hazard.

C) dual agency.

D) signaling.

18) In most pooled ownership forms a single partner is empowered to act on behalf of the investors in terms of making property investment decisions. Based on your understanding of the different types of pooled ownership, which of the following structures would we expect this issue to be the least prevalent?

A) general partnership B) limited partnership C) C corporation D) Subchapter S corporation

19) In recent years, a number of pooled ownership structures have emerged that have changed the analysis of ownership form selection for many investors. Which of the following ownership structures is generally used for small, local investments that are marketed to accredited, but non-institutional investors?

A) general partnership B) limited partnership C) C corporation D) Limited Liability Company

20) In recent years, which of the following pooled ownership structures are used by private funds that are trying to attract capital from very high net worth and institutional investors?

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A) general partnership B) limited partnership C) C corporation D) Limited Liability Company

21) There are a number of ways in which individual and institutional investors can hold investments in commercial real estate as a part of their portfolio. One way is to purchase and hold the title to the actual commercial property, which gives the owner complete control of the asset. This type of transaction would be considered which of the following?

A) direct investment in private commercial real estate equity B) indirect investment in private commercial real estate equity C) direct investment in private commercial real estate debt D) indirect investment in private commercial real estate debt

22) Direct investment in private commercial real estate markets is a preferred means of ownership for the largest institutional market participants. Which of the following types of institutions rely on stable income from commercial real estate properties to pay out retirement benefits?

A) pension funds B) life insurance companies C) commercial banks D) investment banks

23) When investing in commercial real estate through an intermediary, it is important to consider whether the fund has a finite or infinite life. By having a finite life, the fund manager is forced to eventually dispose of the assets and return the investors’ capital. With which of the following fund structures do you expect the issues associated with finite life to be least prevalent?

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A) closed-end commingled real estate fund B) open-end commingled real estate fund C) real estate private equity fund D) public, non-traded REIT

24) Which of the following investment strategies involves starting (or acquiring) and then operating a real estate company which may then acquire real estate investments, development properties, and/or act as a general partner in a variety of investment funds?

A) closed-end commingled real estate fund B) open-end commingled real estate fund C) securitized investment D) full platform operating company

25) When an investment manager acts on behalf of multiple clients, but handles each investor’s assets independently, it is more commonly referred to as: A) syndication.

B) commingled funds.

C) securitized investment.

D) separate accounts.

26) Real estate private equity funds can focus investment on anything from “Class A” real estate to redevelopment in the urban center. On the risk-return spectrum, which of the following private equity fund categories tends to have a heavier development component and often involves investment in riskier property types and locations?

A) core B) value Added C) opportunistic D) full platform

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27) One measure of the importance of a publicly traded asset class in the U.S. economy can be calculated by multiplying the number of publicly traded shares by the current market price of the stock. The result of this calculation is more commonly referred to as: A) market capitalization.

B) capitalization rate.

C) price-earnings ratio.

D) earnings-per-share ratio.

28) Most real estate investment trusts (REITs) are actively managed operating companies that typically focus their investments either by property type or geographic market. As of June 2019, which of the following commercial property types represents the largest proportion of REIT market value?

A) apartments B) office C) infrastructure D) retail

29) An organizational structure in which a REIT is a managing partner and typically majority owner in an operating partnership, which in turn, owns all or part of individual property partnerships is more commonly referred to as a(n): A) MREIT. B) UPREIT. C) DOWNREIT. D) PNLR (Public, nonlisted REIT).

30) The minimum dollar investment amount for purchasing shares in a public, non-listed REIT (PNLR) typically ranges from: A) $100-$250.

B) $1,000-$2,500.

C) $10,000-$25,000.

D) $100,000-$250,000.

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31)

When examining a REIT’s financial statements, GAAP net income will:

A) understate the funds that are available to distribute to investors as dividends since most real estate assets are depreciable.

B) understate the funds that are available to distribute to investors as dividends since most real estate assets are not depreciable.

C) overstate the funds that are available to distribute to investors as dividends since most real estate assets are depreciable.

D) overstate the funds that are available to distribute to investors as dividends since most real estate assets are not depreciable.

32) When measuring REIT income, the REIT industry recommends the use of which of the following earnings metrics?

A) Net Income B) Funds from Operations (FFO) C) Net Operating Income (NOI) D) Net Asset Value (NAV)

33) If the per share stock price of a REIT is greater than its per share net asset value (NAV), the REIT is said to be selling at: A) par value.

B) a discount.

C) a premium.

D) an auction.

34) Which of the following measures, equal to the estimated total market value of a REITs underlying assets, allows investors to compare the value of a publicly traded security to the value of the properties that it holds in the private market?

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A) net income B) net asset value C) funds from operations D) effective gross income

35) Real estate private equity funds have been used to facilitate investment across the riskreturn spectrum. All of the following are characteristics of investments by core funds EXCEPT: A) high quality property.

B) properties located in large metropolitan areas.

C) strong leases.

D) high expected returns.

36) Which of the following types of real estate private equity funds would you expect to invest in properties that have some lease-up risk and/or the need for moderate renovation or repositioning?

A) core B) value added C) opportunistic D) full platform

37) A group of persons or legal entities who come together to carry out a particular activity are more commonly referred to as a: A) syndicate.

B) security.

C) trust.

D) broker.

38) Investors in commercial real estate can hold ownership positions either directly or indirectly. An entity that invests in real estate and sells claims on those investments to the ultimate investors is more commonly referred to as a(n):

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A) syndicate.

B) intermediary.

C) sole proprietorship.

D) tenant.

39) Given the following information, calculate the funds from operation (FFO): Net income: $1,200,000 Gain/losses from infrequent and unusual events: $0 Amortization of tenant improvements: $120,000 Amortization of leasing expenses: $75,000 Depreciation (real property): $2,675,000 A) $195,000 B) $1,395,000 C) $2,870,000 D) $4,070,000

40) Given the following information, calculate the price-FFO multiple for the following REIT: Funds from Operation: $4,000,000 Stock Price: $40 Shares Outstanding: 1,000,000 A) 0.10 B) 0.25 C) 4.00 D) 10.00

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41) Given the following information, calculate the price-FFO multiple for the following REIT: Net income: $1,200,000 Gain/losses from infrequent and unusual events: $0 Amortization of tenant improvements: $120,000 Amortization of leasing expenses: $75,000 Depreciation (real property): $2,675,000 Stock Price: $40 Market Capitalization: $40,000,000 A) 0.10 B) 4.07 C) 9.83 D) 393.12

42) Given the following information, calculate the funds from operation (FFO): Net income: $44,245,000 Gain/losses from infrequent and unusual events: $50,000 Amortization of tenant improvements: $575,000 Amortization of leasing expenses: $133,000 Depreciation (real property): $30,906,000.

A) $12,581,000 B) $75,809,000 C) $75,859,000 D) $75,909,000

43) Given the following information, calculate the price-FFO multiple for the following REIT: Funds from Operation: $75,555,000 Stock Price: $17.80 Shares Outstanding: 185,000,000

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A) 0.03 B) 0.14 C) 7.27 D) 43.58

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

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27) A 28) C 29) B 30) B 31) A 32) B 33) C 34) B 35) D 36) B 37) A 38) B 39) D 40) D 41) C 42) B 43) D Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) In making single-asset real estate investment decisions, the first pass often involves calculating a series of returns, ratios, and multipliers. Which of the following is often cited as a limitation associated with this type of analysis?

A) they are difficult to calculate B) they are complex to understand C) they fail to incorporate cash flows beyond the first year of the analysis D) they are rarely used by industry professionals

2) In an analogy to the stock market, the net operating income of a property can be viewed as which of the following?

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A) annual dividend expected to be produced by the property B) annual return on the value of the property C) market value of the property D) price-earnings ratio of the property

3) In calculating the net operating income (NOI) of a property, the “above-line” treatment of capital expenditures implies: A) capital expenditures are excluded from the calculation of NOI. B) capital expenditures are included in the calculation of NOI. C) capital expenditures are set equal to NOI. D) capital expenditures are divided by NOI.

4) Prior to determining the treatment of capital expenditures in the calculation of NOI, it is important to distinguish these costs from operating expenses. In contrast to operating expenses, capital expenditures: A) add to the market value of the property.

B) are deductible for tax purposes in the year in which they are paid.

C) are necessary to keep the property operating and competitive in its local market.

D) may include minor repairs that maintain property’s useful life.

5) In determining a property’s before-tax cash flow from operations (BTCF) and net operating income (NOI), it is important to understand how each accounts for the use of financial leverage in its calculation. Which of the following statements is true in regards to how these two measures account for the use of financial leverage?

A) BTCF and NOI are both levered cash flows B) BTCF is an unlevered cash flow, while NOI is a levered cash flow C) BTCF is a levered cash flow, while NOI is an unlevered cash flow D) BTCF and NOI are both unlevered cash flows

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6) The key to meaningful valuations in real estate is to use defensible cash flow estimates.

All of the following statements are true in regards to generating accurate cash flow estimates EXCEPT: A) Investors should include only those sources of income and expenses that relate directly to the income producing ability of the property.

B) Investors should only consider recent events, rather than long-term trends when evaluating revenue and expense items.

C) Investors should obtain information about comparable properties whenever possible.

D) Investors should take into consideration local zoning, land use, and environmental controls that may impact the future flow of funds.

7) The measure of cash flow most relevant to investors in income-producing real estate is the after-tax cash flow (ATCF) from property operations. Therefore, it is important to know that the maximum federal income tax rate on individuals as of 2019 is: A) 25%.

B) 30%.

C) 35%.

D) 37%.

8) The going-in capitalization rate can vary significantly by property quality. Which of the following classes of properties within a particular property type would be expected to have the highest cap rates?

A) first tier properties B) second tier properties C) third tier properties D) Cap rates would be equal across all classes within the same property type.

9) Based on your understanding of the relation between the construction of a capitalization rate and a net income multiplier, which of the following statements best describes what we would expect to observe when comparing first-tier (Class A) properties to other property quality classifications within an individual property type?

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A) low capitalization rates and low net income multipliers B) low capitalization rates and high net income multipliers C) high capitalization rates and low net income multipliers D) high capitalization rates and high net income multipliers

10) The going-in capitalization rate can vary significantly by property quality. Which of the following classes of properties within a particular property type would be expected to have the lowest cap rates?

A) first tier properties B) second tier properties C) third tier properties D) Cap rates would be equal across all classes within the same property type.

11) The going-in capitalization rate can vary significantly by property type. Which of the following property types would we expect to have the lowest relative going-in capitalization rate when considering first-tier properties?

A) apartment B) industrial C) office D) retail

12) Profitability ratios, income multipliers, and financial risk ratios can be used to provide a quick assessment of a property’s relative value. Which of the following ratios measures the overall income-producing ability of the property?

A) capitalization rate B) equity dividend rate C) debt coverage ratio D) operating expense ratio

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13) Profitability ratios, multipliers, and financial risk ratios can be used to provide a quick assessment of a property’s relative value. Which of the following groups of metrics are designed to provide a quick assessment of whether a property appears to be priced reasonably relative to its gross or net income?

A) income multipliers B) profitability ratios C) financial risk ratios D) All of the answers choices are correct.

14) Based on your understanding of ratio analysis in commercial real estate investment, which of the following is an example of a profitability ratio?

A) debt yield ratio B) equity dividend rate C) loan-to-value ratio D) operating expense ratio

15) Single year return measures and ratios can be categorized into three groups: profitability ratios, multipliers, and financial ratios. All of the following are considered financial ratios EXCEPT: A) capitalization ratio.

B) operating expense ratio.

C) loan-to-value ratio.

D) debt yield ratio.

16) Based on your understanding of the variables used to calculate a capitalization rate and an equity dividend rate, which of the following statements best describes the difference in how each handles the effect of mortgage financing?

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A) In constructing the EDR, the analyst subtracts the effects of mortgage financing from the numerator, but not the denominator.

B) In constructing the EDR, the analyst subtracts the effects of mortgage financing from the denominator, but not the numerator.

C) In constructing the EDR, the analyst subtracts the effects of mortgage financing from both the numerator and the denominator.

D) In constructing the EDR, the analyst does not subtract the effects of mortgage financing from neither the numerator nor the denominator.

17) Helpful in assessing the risk of lending to investors for particular projects, which of the following calculations measures the income-producing ability of the property to meet operating and financial obligations?

A) profitability ratios B) income multipliers C) financial risk ratios D) income tax multipliers

18) The loan-to-value ratio measures the percentage of the acquisition price (or current market value) encumbered by debt. To protect their invested capital in the event that property values do fall, commercial mortgage lenders generally require that the senior mortgage not exceed approximately what percentage of the acquisition price?

A) 60% B) 70% C) 80% D) 90%

19) Unlike the debt coverage ratio, the debt yield ratio (DYR) is not affected by the interest rate or amortization period of the loan; the DYR is simply a measure of how large the NOI is relative to the loan amount. Lenders who rely on this ratio are typically willing to accept a minimum DYR of:

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A) 10%.

B) 20%.

C) 60%.

D) 80%.

20) The placement of nonrecurring capital expenses in pro forma cash flow projections has not been standardized. The modern treatment of capital expenditures in investment analysis is to treat capital expenditures: A) above-line.

B) below-line.

C) in-line.

D) out-of-line.

21) The debt coverage ratio is used to indicate how much the NOI can decline before it will not cover the debt service on the property. While DCRs can vary based on competition within a particular market, lenders usually seek a minimum DCR of: A) 0.80.

B) 1.00.

C) 1.20.

D) 1.40.

22) Given the following information, calculate the cash down payment required to purchase the specific property: Purchase Price: $500,000 Loan Amount: 80% of purchase price Up-front financing costs: 2.5% of loan amount A) $90,000 B) $110,000 C) $136,250 D) $200,000

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23) Given the following information, calculate the total amount of annual operating expenses for this income-producing property: Lawn care: $10,000 Property taxes: $24,000 Maintenance: $35,000 Janitorial: $25,000 Security: $32,000 Debt service: $145,000 A) $102,000 B) $126,000 C) $247,000 D) $271,000

24) Given the following information, calculate the going-in capitalization rate for the specific property: First-year NOI: $18,750 Acquisition price: $150,000 Equity Investment: 20% A) 2.5% B) 12.5% C) 15.6% D) 62.5%

25) Given the following information, calculate the equity dividend rate for this investment: First-year NOI: $18,750 Before-tax cash flow: $11,440 Acquisition price: $520,000 Equity Investment: 20% A) 2.2% B) 3.6% C) 11.0% D) 18.02%

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26) Given the following information, calculate the effective gross income multiplier for the specific investment: Effective gross income: $49,500 First-year NOI: $18,750 Acquisition price: $520,000 Equity Investment: 20% A) 0.036 B) 0.095 C) 10.5 D) 27.7

27) Given the following information, calculate the operating expense ratio for this property: Potential gross income: $120,000 Vacancy rate: 9% Net operating income: $57,900 Operating expenses: $51,300 A) 34% B) 43% C) 47% D) 53%

28) Given the following information, calculate the debt coverage ratio for this investment: Potential gross income: $120,000 Vacancy rate: 9% Net operating income: $57,900 Operating expenses: $51,300 Acquisition Price: $520,000 Debt service: $40,000 A) 0.69 B) 1.45 C) 2.73 D) 8.29

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29) Given the following information, calculate the net income multiplier for this property: First-year NOI: $18,750 Acquisition price: $150,000 Equity investment: 20% A) 0.1 B) 1.6 C) 8.0 D) 12.5

30) Given the following information, calculate the loan-to-value ratio for this propertyLoan amount: $450,000 Interest rate: 7.5% Acquisition price: $550,000 A) 0.18 B) 0.82 C) 0.99 D) 1.22

31) Suppose the operating agreement of an LLC insists that all investors receive their pro rata share of all cash flows when a property is liquidated from the portfolio. If all 15 investors contributed an equal amount of equity in establishing the LLC, each investor should receive how much from the liquidation of a property valued at $3,500,000.

A) $233,333 B) $350,000 C) $3,500,000 D) $52,500,000

32) Given the following information, calculate the after tax-cash flow for this property: Debt Service: $45,000 First-year NOI: $91,750 Tax liability: 25% of Before Tax Cash Flow

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A) $23,812.50 B) $35,062.50 C) $68,812.50 D) $80,500.00

33) Given the following information, calculate the debt yield ratio on the following commercial property: Estimated Net Operating Income in the first year: $250,000 Loan amount: $2,047,500 Purchase price: $2,730,000 A) 4.8% B) 12.2% C) 68.6 % D) 75.2 %

34) Given the following information, calculate the capitalization rate for the following apartment complex: Number of apartments: 15 Market Rent (per month): $1,000 Vacancy and Collection Loss: 10% of potential gross income Operating Expenses: 5% of effective gross income Capital Expenditures: 10% of effective gross income Acquisition Price: $1,710,000 A) 8.1% B) 9.0% C) 9.5% D) 10.5%

35) Suppose you plan to put a 20% down payment on a house and obtain a mortgage loan that is less than the size limit on conforming loans ($417,000) to finance the remainder of the purchase. Based on your understanding of the loan-to-value ratio, what is the maximum price that you could pay for a home with these restrictions in mind?

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A) $333,600 B) $500,400 C) $521,250 D) $2,085,000

36) If the lender has agreed to offer you a loan with a loan-to-value ratio of 85%, what is the size of the loan if the purchase price of the home is $500,000?

A) $75,000 B) $400,000 C) $425,000 D) $588,235

37) When a mortgage loan is obtained, the cash down payment (equity) required at property acquisition is a function of the acquisition price and the net loan proceeds. Given the following information, determine the required equity down payment on the property: Acquisition price: $1,500,000 Face amount of loan: $975,000 Up front financing costs: 2 points A) $505,000 B) $525,000 C) $544,500 D) $2,494,500

38) Given the following information, calculate the total amount of annual operating expenses for this income-producing property: Minor roof repairs: $20,000 Property taxes: $30,000 Maintenance: $25,000 Janitorial: $15,000 Security: $10,000 Debt service: $175,000

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A) $70,000 B) $80,000 C) $100,000 D) $275,000

39) Given the following information, calculate the going-in capitalization rate for the specific property: First-year NOI: $87,750 Acquisition price: $1,250,000 Equity Investment: 35% Before-tax cash flow: $53,500 A) 4.3% B) 7.0% C) 10.8% D) 20.1%

40) Given the following information, calculate the equity dividend rate for this investment: First-year NOI: $87,750 Acquisition price: $1,250,000 Equity investment: 35% Before-tax cash flow: $53,500 A) 4.3% B) 7.0% C) 12.2% D) 20.1%

41) Given the following information, calculate the acquisition price of the property: First-year NOI: $57,750 Capitalization rate 8.5% Equity Investment: 30%

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A) $192,500 B) $203,824 C) $679,412 D) $2,264,706

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

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27) C 28) B 29) C 30) B 31) A 32) B 33) B 34) A 35) C 36) C 37) C 38) C 39) B 40) C 41) C Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) To overcome the potential shortcomings of single-year decision making metrics, many investors in real estate also perform multiyear discounted cash flow (DCF) valuation. DCF valuation differs from the single-year ratio analysis in all of the following ways EXCEPT: A) Only with DCF must the investor estimate an appropriate investment horizon accounting for how long she will hold the property.

B) Only with DCF must the investor select the appropriate yield at which to discount all expected future cash flows.

C) Only with DCF must the investor make explicit forecasts of the property’s net operating income for each year in the expected holding period.

D) Only with DCF must the investor use a defensible cash flow estimate that incorporates appropriate measures of income and expenses.

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2) While the general concepts of investment value and market value are very similar, there is an important distinction between the two. All of the following statements regarding investment value are true EXCEPT: A) Investment value is based on the expectations of a typical, or average, investor.

B) Investment value is a function of estimated cash flows from annual operations.

C) Investment value takes into consideration estimated proceeds from the sale of the property.

D) Investment value applies a discount rate to future cash flows.

3) Which of the following terms can best be described as the maximum value a buyer would be willing to pay and the minimum value a seller would be willing to accept?

A) investment value B) market value C) book value D) construction value

4) In discounted cash flow analysis, the industry standard for pro forma cash flow projections of investment properties is typically: A) 3 years.

B) 5 years.

C) 10 years.

D) 15 years.

5)

The use of mortgage debt to help finance an investment is commonly referred to as: A) leverage.

B) capitalization.

C) amortization.

D) acquisition.

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6) It is common for investors in real estate to use mortgage debt to help finance capital investment. The use of debt can have a profound impact on the expected cash flows for a particular property. Which of the following terms refers to cash flows that represent the property’s income after subtracting any payments due to the lender?

A) levered cash flows B) unlevered cash flows C) discounted cash flows D) compounded cash flows

7) Net present value (NPV) is interpreted using the following decision rule: The investor will purchase the property as long as the NPV is: A) greater than zero.

B) equal to zero.

C) less than zero.

D) equal to the opportunity cost of investment.

8) Changes in the discount rate used to complete net present value analysis can have a significant impact on the estimated value of the investment and therefore affect the overall investment decision. As the required internal rate of return (IRR) increases, the net present value will: A) decline.

B) increase.

C) remain the same.

D) become zero.

9) The internal rate of return (IRR) on a proposed investment is the discount rate that makes the net present value of the investment: A) greater than zero.

B) equal to zero.

C) less than zero.

D) greater than the opportunity cost of not investing.

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10) While net present value (NPV) and internal rate of return (IRR) analysis both may be used as investment decision criteria, there are some limitations to the IRR method that make its use as an investment criterion problematic in certain situations. All of the following are limitations of the IRR method EXCEPT: A) IRR calculations assume that cash flows are reinvested at the IRR, rather than at the actual rate that investors expected to earn on reinvested cash flows.

B) With the IRR decision criterion multiple solutions may exist for investments where the sign of the cash flows changes more than once over the expected holding period.

C) The IRR methodology cannot be used to make comparisons across different investment opportunities.

D) The use of IRR as a decision criterion will not necessarily result in wealth maximization for the investor.

11) Based on your understanding of the decision rule associated with an internal rate of return (IRR) calculation, the investor will reject the property investment opportunity if: A) the calculated IRR is less than the required IRR. B) the calculated IRR is greater than the required IRR. C) the calculated IRR is equal to the required IRR. D) the calculated IRR is greater than the Net Present Value (NPV) .

12) The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition, the net cash flows from rental operations, the net cash flows from the eventual sale of the property, and the ultimate return on invested equity.

Assuming the going-in IRR is greater than the effective borrowing cost, if an investor increases his leverage rate, say from 75% to 80%, we would expect which of the following to occur?

A) both NPV and going-in IRR increase B) NPV decreases, while going-in IRR increases C) NPV increases, while going-in IRR decreases D) both NPV and going-in IRR decrease

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13) The use of financial leverage when investing in real estate is a double-edged sword.

While increased leverage may allow the investor to “purchase” higher expected returns, the “price” of doing so is an increase in which of the following risks?

A) liquidity risk B) default risk C) interest rate risk D) pipeline risk

14) An important piece of criteria for investors to consider when deciding between real estate investment opportunities and investing in stocks or bonds is the effect of income taxes on their return. For most investors, the effective tax rate on commercial real estate is: A) greater than the effective tax rate on a stock or bond investment.

B) equal to the effective tax rate on a stock or bond investment.

C) less than the effective tax rate on a stock or bond investment.

D) cannot be compared across asset classes.

15) Just as it is important for an investor to consider the impact of financial leverage on her return, it is also necessary to account for the effect of income taxes. How would the presence of income taxes impact the levered going-in IRR? A) income taxes increase the levered going-in-IRR B) income taxes reduce the levered going-in-IRR C) income taxes do not affect the going-in-IRR D) income taxes cause the levered going-in-IRR to become invalid as a measure of return

16) When properties are financed with debt, valuation of the cash flows to the equity investor is best accomplished by discounting which of the following property cash flow measures?

A) potential gross income B) net operating income C) effective gross income D) before-tax cash flow

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17) In discounted cash flow (DCF) analysis, the sale price of the property must be estimated at the end of the expected holding period. The most common method for determining the terminal value of the property is the: A) yield capitalization method.

B) direct capitalization method.

C) repeat-sales approach.

D) cost approach.

18) Many investors use mortgage debt to help finance capital investment for incomeproducing real estate. In doing so, the owner will receive income as long as the property produces enough income to cover all operating and capital expenditures, the mortgage payment, and all state and federal income taxes. Therefore, the owner’s claim is commonly referred to as a: A) primary claim.

B) joint claim.

C) residual claim.

D) superior claim.

19) Based on your understanding of the differences between levered and unlevered cash flows, which of the following is an example of a levered cash flow?

A) net operating income B) net Sale Proceeds C) sale price D) before-tax cash flow

20) The most relevant cash flow measure for investors in commercial real estate who own properties through a sole proprietorship, limited partnership, limited liability company, or private equity fund is the property’s:

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A) before-tax cash flow.

B) after-tax cash flow.

C) net operating income.

D) potential gross income.

21) Given the following information, calculate the estimated terminal value of the property at the end of its holding period. Going-out cap rate: 9%, Estimated holding period: 5 years, NOI for year 5: $100,500, NOI for year 6: $102,000.

A) $1,113,333 B) $1,116,667 C) $1,133,333 D) $1,166,667

22) Given the following information, calculate the before-tax equity reversion (BTER): NOI: $89,100 Annual Debt Service: $58,444 Net Sale Proceeds: $974,700 Remaining Mortgage Balance: $631,026 A) $30,656 B) $343,674 C) $572,582 D) $885,600

23) Given the following information, calculate the appropriate after-tax discount rate: Tax rate on comparable risk investment: 35% Investor’s before-tax opportunity cost: 12% Capitalization rate: 8% A) 2.8% B) 4.2% C) 5.2% D) 7.8%

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24) Given the following information, calculate the going-out cap rate: Estimated holding period: 5 years NOI for year 1: $120,000 NOI for year 5: $150,000 NOI for year 6: $155,250 Expected sale price at end of year 5: $1,350,000 A) 8.9% B) 11.1% C) 11.5% D) 11.9%

25) Given the following information, calculate the NPV for this property: Initial cash outflow: $200,000 Discount rate: 15% CF for year 1: $25,876 CF for year 2: $23,998 CF for year 3: $23,013 CF for year 4: $22,105 CF for year 5: $144,670 A) −$51,875 B) −$59,657 C) $140,343 D) $295,951

26) Suppose you purchased an income producing property for $95,000 five years ago. In Year 1, you were able to negotiate a lease that paid $10,000 per year at the end of each year. If you are able to sell the property at the end of year 5 for $100,000 (after receiving our final lease payment), what was the internal rate of return (IRR) on this investment?

A) −18.18% B) 1.03% C) 9.57% D) 11.37%

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27) A client has requested advice on a potential investment opportunity involving an income producing property. She would like you to determine the internal rate of return of the investment opportunity based on the following information: Expected Holding Period: 5 years End of first year NOI estimate: $113,900 NOI estimates in subsequent years will grow by 5% per year Price at which the property is expected to be sold at the end of year 5: $1,615,205.22 Current market price of the property: $1,475,667.71 A) −15.30% B) 8.60% C) 9.86% D) 10.00%

28) Given the following expected cash flow stream, determine the NPV of the proposed investment in an income producing property and determine whether or not the investment should be pursued: Investment Horizon: 5 years Expected Yearly Cash Flow in each of the next five years: $127,628 Expected Sale Price at end of 5 years: $1,595,350 Opportunity Cost of Investment: 6% Current Market Price of Property: $1,750,000 A) NPV is −$20,246; decision is to invest B) NPV is −$20,246; decision is not to invest C) NPV is $249,967; decision is to invest D) NPV is $249,967; decision is to not invest

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29) Given the following information regarding an income producing property, determine the NPV using levered cash flows in your analysis Required equity investment: $270,000 Expected NOI for each of the next five years: $150,000 Debt Service for each of the next five years: $125,000 Expected Holding Period: 5 years Required yield on levered cash flows: 15% Expected Sale Price at end of Year 5: $2,000,000 Expected Cost of Sale: $125,000 Expected Mortgage Balance at time of sale: $1,500,000 A) $245.15 B) $270,245.15 C) $419,264.54 D) $1,435,029.64

30) Given the following information regarding an income producing property, determine the unlevered internal rate of return (IRR): Expected Holding Period: 5 years 1st year Expected NOI: $89,000 2nd year Expected NOI: $91,773 3rd year Expected NOI: $94,526 4th year Expected NOI: $97,362 5th year Expected NOI: $100,283 Debt Service in each of the next five years: $58,444 Current Market Value: $885,000 Required equity investment: $221,250 Net Sale Proceeds of Property at end of year 5: $974,700 Remaining Mortgage Balance at end of year 5: $631,026 A) 10.6% B) 12.2% C) 22.9% D) 33.4%

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31) Given the following information regarding an income producing property, determine the internal rate of return (IRR) using levered cash flows: Expected Holding Period: 5 years 1st year Expected NOI: $89,100 2nd year Expected NOI: $91,773 3rd year Expected NOI: $94,526 4th year Expected NOI: $97,362 5th year Expected NOI: $100,283 Debt Service in each of the next five years: $58,444 Current Market Value: $885,000 Required equity investment: $221,250 Net Sale Proceeds of Property at end of year 5: $974,700 Remaining Mortgage Balance at end of year 5: $631,026 A) 10.6% B) 12.2% C) 22.9% D) 33.4%

32) Given the following information regarding an income producing property, determine the after tax net present value (NPV): Expected Holding Period: 5 years 1st year Expected BTCF: $30,656 2nd year Expected BTCF: $33,329 3rd year Expected BTCF: $36,082 4th year Expected BTCF: $38,918 5th year Expected BTCF: $41,839 1st year Expected Tax Liability: $7,645 2nd year Expected Tax Liability: $8,658 3rd year Expected Tax Liability: $9,708 4th year Expected Tax Liability: $10,798 5th year Expected Tax Liability: $6,951 Estimated Before Tax Equity Reversion at the end of year 5: $343,674 Expected Taxes Due on Sale at end of year 5: $32,032 Required equity investment: $241,163 After Tax Opportunity Cost: 11.2% Version 1

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A) −$40,858 B) −$91,785 C) $40,858 D) $91,785

33) Given the following information regarding an income producing property, determine the after tax internal rate of return (IRR): Expected Holding Period: 5 years 1st year Expected BTCF: $30,656 2nd year Expected BTCF: $33,329 3rd year Expected BTCF: $36,082 4th year Expected BTCF: $38,918 5th year Expected BTCF: $41,839 1st year Expected Tax Liability: $7,645 2nd year Expected Tax Liability: $8,658 3rd year Expected Tax Liability: $9,708 4th year Expected Tax Liability: $10,798; 5th year Expected Tax Liability: $6,951 Estimated Before Tax Equity Reversion at end of year 5: $343,674 Expected Taxes Due on Sale at end of year 5: $32,032 Required equity investment: $241,163 A) 11.2% B) 13.3% C) 15.4% D) 20.3%

34) Suppose an industrial building can be purchased for $2,500,000 and is expected to yield cash flows of $180,000 each of the next five years (Note: assume payments are made at end of year). If the building can be sold at the end of the fifth year for $2,800,000, calculate the IRR for this investment over the five year holding period.

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A) 0.09% B) 4.57% C) 9.20% D) 10.37%

35) Determine the net present value (NPV) of an investment decision to purchase a property for $90,000 that will generate annual cash flows of $10,000 per year for eight years and sell for $80,000 at the end of the eight year holding period, if the appropriate discount rate is 10%?

(Note: Assume payments are made at end of year.)

A) −$2,475 B) −$609 C) +$609 D) +$2,475

36) Given the following expected cash flow stream, determine the IRR of the proposed investment in an income producing property and determine whether or not the investment should be pursued using IRR as your decision making criteria: Investment Horizon: 5 years Expected Yearly Cash Flow in each of the next five years: $127,628 Expected Sale Price at end of 5 years: $1,595,350 Required return on equity: 5% Current Market Price of Property: $1,750,000 A) IRR is 4.92%; Decision is to invest B) IRR is 4.92%; Decision is to not invest C) IRR is 5.72%; Decision is to invest D) IRR is 5.72%; Decision is to not invest

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37) Given the following expected cash flow stream, determine the NPV of the investment opportunity: Investment Horizon: 3 years End of first year NOI estimate: $886,464 End of second year NOI estimate: $913,058 End of third year NOI estimate: $940,450 Price at which the property is expected to be sold at the end of year 3: $5,000,000 Current market price of the property: $6,200,000 Discount rate: 9% A) −$321,010.66 B) −$28,451 C) +$28,451 D) +$321,010.66

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

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27) D 28) B 29) A 30) B 31) C 32) C 33) C 34) C 35) C 36) C 37) B Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) The direct ownership of commercial real estate produces cash flows from rental operations and, perhaps, cash flow from an eventual sale of the property. Since financial leverage and tax considerations play an important part in determining an investor’s returns, the measure of investment value most relevant to investors is the present value of: A) before-tax cash flows (BTCF).

B) after-tax cash flows (ATCF).

C) net operating income (NOI).

D) net sale proceeds (NSP).

2) U.S. tax law is designed to raise revenues for the operations of the federal government and to promote certain socially desirable real estate-related activities. Tax legislation is combined into a single section of the federal statutory law commonly referred to as: A) Section 1231.

B) Section 1031.

C) the Internal Revenue Code.

D) Tax Reform Act.

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3) Under certain circumstances, investors are permitted to reduce the amount of the taxable income that they report by an amount that is intended to reflect the wear and tear of an asset over time. This is commonly referred to as: A) appreciation.

B) depreciation.

C) capital gains.

D) capital losses.

4) For purposes of federal income taxes, real property is classified into four categories. With which of the following types of real estate is the investor able to reduce his taxable income to reflect the wear and tear of a property over time?

A) personal residence B) dealer property C) trade or business property D) investment property

5) Suppose a taxpayer owns an apartment complex. Under U.S. tax law, in what category would this property be classified?

A) personal residence B) dealer property C) trade or business property D) investment property

6) For purposes of federal income tax consideration, the distinction between dealer property and investment property is: A) taxpayer specific.

B) investment specific.

C) property type specific.

D) geographic specific.

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7) From a federal tax perspective, properties that are held for sale to others (i.e., viewed as inventory) would be classified into which of the following categories?

A) personal residence B) dealer property C) trade or business property D) investment property

8) Distinguishing between the four categories of real estate for federal tax purposes can be misleading at times. Which of the following categories includes properties that are held primarily for capital appreciation?

A) personal residence B) dealer property C) trade or business property D) investment property

9) There are three main types of income subject to federal taxation. Which of the following types of income includes income generated from rental real estate investments?

A) active income B) portfolio income C) passive activity income D) residual income

10) Which of the following types of income includes income earned from salaries, wages, commissions, and bonuses?

A) active income B) portfolio income C) passive activity income D) residual income

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11) Dividends received from the ownership of a real estate investment trust (REIT) are classified as which of the following types of income according to federal tax laws?

A) active income B) portfolio income C) passive activity income D) residual income

12) Interest earned on a mortgage or mortgage backed security (MBS) is classified as which of the following types of income according to federal tax laws?

A) active income B) portfolio income C) passive activity income D) residual income

13) When cash flows are classified as passive activity income, investors are subject to passive activity loss restrictions. These restrictions imply that passive income losses: A) can be used to offset positive taxable income from other passive activities.

B) can be used to offset positive taxable income from other passive and active activities.

C) can be used to offset positive taxable income from other passive and portfolio activities.

D) cannot be used to offset positive taxable income from any type of activity.

14) When an investment appreciates in value during the investment holding period, the appreciation is generally taxed at which of the following rates?

A) ordinary tax rates B) capital gain tax rates C) portfolio income tax rates D) active income tax rates

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15) Since many commercial properties are held by limited liability corporations or limited partnerships, it is important to understand the tax consequences at the individual investor level.

Individuals face different tax rates depending on the level of their taxable income. As of 2019, an individual making between $84,201 and $160,725 would fall into which of the following tax brackets?

A) 15% B) 24% C) 28% D) 35%

16) Certain costs associated with a property’s upkeep as well as the manner in which it was financed can be depreciated and therefore have a beneficial impact on the tax paid by the investor in a particular year. Which of the following cash outflows is deductible for income tax purposes in the year in which they are made?

A) operating expenses B) capital expenditures C) up-front financing costs D) repayment of principal

17) The value of a property can be thought of as having two components, a land component and a building component. Since the land component of the original cost basis is not depreciable, it is important to understand how much of the property’s value is typically attributed to the land for tax purposes. As a general rule, the value of land constitutes what percentage (expressed as a range) of the total value of a commercial property?

A) 0% to 10% B) 10% to 30% C) 30% to 50% D) 50% to 70%

18) Congressional legislation has repeatedly altered the period of time over which rental real estate may be depreciated. Currently, residential income producing property (e.g. apartments) may be depreciated over no less than:

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A) 3 years.

B) 7 years.

C) 15 years.

D) 27 ½ years.

19) Current tax law allows investors to take tax credits for the cost of renovating or rehabilitating historic structures. Which of the following statements regarding tax credits is true?

A) A $1 tax credit reduces the investor’s tax liability by an amount dependent on the individual’s income tax bracket.

B) A $1 tax credit reduces the investor’s tax liability by $1.

C) A $1 tax credit increases the investor’s taxable income by $1.

D) A $1 tax credit has exactly the same impact on an investor’s tax liability as a tax deduction.

20) The potentially large amount of taxes due on sale of commercial property has caused investors and policy makers to seek ways to defer taxes on the disposition of a property. A popular option has become for investors to swap one eligible property for another in order to avoid or defer capital gains taxes. Which of the following methods for deferring taxes does this describe?

A) installment sale B) fully-taxable sale C) like-kind exchange D) sale leaseback

21) In a like-kind exchange, property owners must meet a number of conditions in order to be eligible to take advantage of this tax deferment. One criterion is for the exchange to be between “like-kind” properties. Which of the following exchanges represents an example of an eligible “like-kind” exchange?

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A) an apartment property for shares in a publicly traded REIT B) a retail property in the U.S. for a retail property in China C) an office property for a principal residence D) a retail property for an office property, both within the U.S

22) The benefit of being classified as a capital gain is that the income is subject to a tax rate that maxes out at 20%, which may be well below the tax rates associated with depreciation recapture income and ordinary income for a particular investor. In order to qualify for the lower capital gain tax rate, the property being sold must be held for more than: A) 1 month.

B) 3 months.

C) 6 months.

D) 12 months.

23) All taxable income from investment property sales must eventually be classified as either ordinary income, depreciation recapture income, or capital gain income. What is the maximum tax rate that an investor can be charged on depreciation recapture income?

A) 10% B) 15% C) 25% D) 35%

24) Johnson Builders is in the new residential construction business. They built a house that sat empty for 6 months after its completion. This type of property would be categorized as a: A) personal residence.

B) dealer property.

C) trade or business property.

D) investment property.

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25) Sharon purchased a new photocopier for her business. According to her accountant, she can deduct 1/7th of its original cost each year for the next seven years from her taxable income.

This depreciation method is commonly referred to as: A) declining balance method.

B) straight line method.

C) sum of the years’ digits method.

D) modified accelerated cost recovery system.

26) Limited liability companies (LLCs) and limited partnerships are preferred to corporate ownership structures because these forms of ownership allow investors to obtain limited liability and avoid the double taxation faced by corporations. This tax benefit can be extremely important as the maximum capital gain rate for corporations remains at (as of 2019): A) 15%.

B) 21%.

C) 35%.

D) 45%.

27) The tax treatment of real estate holdings that are classified as trade or business property and are held for more than one year is more commonly referred to as which of the following sections of the tax code?

A) Section 1231 B) Section 1031 C) Section 856 D) Section 851

28) Homeowners receive preferential tax treatment under current federal income tax laws.

The benefits that homeowners receive from this treatment include all of the following EXCEPT:

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A) Appreciation in the value of the home that has occurred since the time of purchase is excluded from federal taxable income.

B) Homeowners can deduct their mortgage interest expenses on both first (primary) and second homes from federal taxable income.

C) Homeowners can deduct local property taxes from federal taxable income.

D) Losses on the sale of a personal residence can be deducted from federal taxable income.

29) Given the following information, calculate the straight-line depreciation rate for the first year using the midmonth convention.

Cost recovery period: 27 ½ years Date of purchase: April 10th A) 2.6%.

B) 3.63%.

C) 19.5%.

D) 70.8%.

30)

Given the following information, calculate the depreciation allowance for year 1.

Depreciable Basis: $200,000 Declining Balance Depreciation: 175% Cost Recovery Period: 27 years A) $3,704 B) $6,481 C) $7,407 D) $12,963

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31) Given the following information, calculate the taxes due on sale for the following fully taxable sale.

Net Sale Proceeds: $1,500,000 Adjustable Basis: $830,000 Depreciation Recapture: $150,000 Capital Gain Tax: 15% Depreciation Recapture tax: 25%

A) $37,500 B) $78,000 C) $100,500 D) $115,500

32) The use of mortgage debt to finance an income property investment has certain tax consequences. For example, up-front financing costs for investment properties are not fully deductible in the year in which they are paid. Instead, they must be amortized over the life of the loan. If up-front financing costs on a 30-year loan total $6,000, what is the maximum amount per year that the investor can deduct when calculating taxable income from rental operations?

(Assume that there is no prepayment on the loan.)

A) $100 B) $200 C) $2,400 D) $6,000

33) The tax treatment of up-front financing costs calls for these expenses to be amortized over the life of the loan. However, if the loan is prepaid prior to the term of the loan (perhaps because the property is sold), the tax treatment of these costs changes. If up-front financing costs on a 30-year loan total $6,000, and the loan is prepaid in full at the end of year 5, what is the maximum amount that the investor can deduct when calculating taxable income from rental operations in year 5?

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A) $5,000 B) $5,200 C) $5,600 D) $6,000

34) Accelerated methods of depreciation result in greater depreciation allowances than straight-line depreciation in the early years of the depreciation schedule. Suppose a personal property is eligible for a three-year cost recovery period and can be depreciated using 200 percent declining balance depreciation. Calculate the accelerated depreciation rate in the first year.

A) 14.28% B) 28.57% C) 33.33% D) 66.66%

35) Given the following information, calculate the straight-line depreciation rate for the second year: Cost recovery period: 27 ½ years Date of purchase: June 12th A) 1.67% B) 1.97% C) 3.63% D) 20.0%

36) Given the following information, calculate the accelerated rate of depreciation that can be applied to the unrecovered basis: Depreciable Basis: $100,000 Declining Balance Depreciation: 150% Cost Recovery Period: 15 years

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A) 3.63% B) 5.56% C) 6.67% D) 10.0%

37) Given the following information, determine the unrecovered depreciable basis: Depreciable Basis: $300,000 Declining Balance Depreciation: 200% Cost Recovery Period: 7 years A) $42,857 B) $85,714 C) $214,286 D) $257,143

38) Suppose that you are able to generate an annual depreciation deduction of $34,000 that would otherwise have been taxed at a 30% rate each year for 5 years. Determine the present value of the annual tax savings using a 7.5% discount rate.

A) $26,683 B) $41,268 C) $96,292 D) $137,560

39) Tax depreciation shelters a portion of annual operating income from taxation. However, the amount of cumulative tax depreciation is taxed when the property is sold. Suppose that your taxes due on sale will be $35,000 greater than if the property had not been depreciated. If the sale were to occur 5 years from now, determine the present value of the tax on depreciation recapture in the year of sale assuming a discount rate of 9.5%.

A) $22,233 B) $31,963 C) $55,098 D) $134,390

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40) Suppose that you are able to generate an annual depreciation deduction of $20,000 that would otherwise have been taxed at a 30% rate each year for 7 years. Suppose that your taxes due on sale in year 7 will be $32,000 greater than if the property had not been depreciated.

Determine the net benefit of depreciation assuming a discount rate of 6.5%.

A) $12,315 B) $20,592 C) $32,907 D) $53,499

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

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27) A 28) D 29) A 30) D 31) D 32) B 33) B 34) D 35) C 36) D 37) C 38) B 39) A 40) A Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) Unlike many publicly traded stock and bond investments, commercial real estate investments: A) can be bought and sold in highly liquid markets.

B) yield maximized returns when assets are held for short periods of time.

C) yield returns generated mostly from the asset’s net operating income, rather than price appreciation.

D) have going-in and going-out transaction costs that are low (as a proportion of asset value).

2) Commercial real estate returns are determined in no small part by how well the ongoing management function is performed. Management decisions can be classified into two categories: property management and asset management. Which of the following functions would be considered a primary responsibility of an asset manager?

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A) property acquisitions and dispositions B) marketing a property to prospective tenants C) maintaining the condition of the property D) signing leases

3) The real estate industry applies which of the following labels to individuals who are responsible for the decisions that affect the physical, financial, or ownership structure of the property.

A) asset manager B) property manager C) leasing manager D) regional manager

4) Leases are considered the engines that drive property values. Therefore, it should not be surprising that owners of commercial property may seek an independent leasing broker to focus on finding tenants to lease space. In exchange for their services, leasing brokers are paid a commission based on what percentage of the face amount of the lease?

A) 0.5 to 1.5% B) 3 to 5% C) 7 to 10% D) 15 to 20%

5) When leasing nonresidential properties, owners would prefer to rent exclusively to high quality tenants. Such owners will tend to seek out companies whose general debt obligations are rated “investment grade” by one or more of the U.S. rating agencies. These potential tenants are more commonly referred to as: A) tenant reps.

B) credit tenants.

C) tenant mix.

D) in-house leasing agents.

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6) Brokers or agents that specialize in helping tenants find suitable space are more commonly referred to as: A) tenant reps.

B) credit tenants.

C) tenant mix.

D) lessors.

7) The commercial property owner traditionally has three basic leasing options when it comes to determining who is primarily responsible for finding tenants and negotiating lease terms. Which of the following individuals is an employee of the property owner who devotes 100% of his or her time to coordinating leasing arrangements for the owner’s property or properties?

A) asset manager B) property manager C) leasing broker D) in-house leasing agent

8) For residential properties, the ratio of prospective rent to gross monthly income is a valuable screening tool in judging a potential tenant’s ability to fulfill rent obligations. Generally, this ratio should not exceed: A) 10%.

B) 20%.

C) 30%.

D) 40%.

9) When property managers are looking to secure a mix of tenants for which “the whole is greater than the sum of its parts,” or in other words a group of tenants that shares similar characteristics such that the experience of living together is mutually beneficial, they are seeking what is referred to as:

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A) permanence potential.

B) synergism.

C) rehabilitation.

D) adaptive reuse.

10) The lease is a contract between the owner and the tenant that transfers exclusive use and possession of the space to the tenant in return for rent or other consideration. In this arrangement, the owner is referred to as the: A) lessor.

B) lessee.

C) agent.

D) benchmark.

11)

In a lease contract, the tenant is more formally referred to as the: A) lessor.

B) lessee.

C) agent.

D) benchmark.

12) Concerned with a potential information asymmetry problem, state legislators have been proactive in passing legislation that protects the rights and interests of tenants within which of the following property types?

A) office B) retail C) industrial D) apartment

13) Maintenance and repair of a property is an ongoing process that can be divided into four principal categories. Which of the following classifications includes ordinary repairs to a building on a day-to-day basis (e.g. repairing a broken window, fixing a leaking roof)?

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A) custodial maintenance B) corrective maintenance C) preventive maintenance D) deferred maintenance

14) An owner whose property is in a strong market position, where fewer services can be offered to tenants for the same dollar of rental income and where the owner will not lose tenants if the property is under-maintained, is said to participate in a market that has: A) a relatively elastic demand for space.

B) a relatively inelastic demand for space.

C) economies of scale.

D) diseconomies of scale.

15) While some property owners choose to perform both the property and asset manager functions themselves, many commercial property owners choose to employ professional property managers instead. The property manager works under a management contract in which the manager is empowered to serve as the owner’s fiduciary. This type of relationship is more commonly referred to as a(n): A) agency relationship.

B) open listing relationship.

C) joint-venture.

D) correspondent relationship.

16) Both owners and managers must carefully designate their responsibilities in the management agreement. In a management agreement, all of the following would typically be responsibilities of the property manager EXCEPT: A) maintenance of financial accounts for money collected from tenants.

B) liability.

C) general property management.

D) reports on property performance.

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17) The management agreement provides for a management fee that is usually in the range of 3 to 6% of which of the following measures of property income?

A) potential gross income B) effective gross income C) net operating income D) income tax liability

18) While college-level courses are not widely available, a number of professional and trade organizations exist in the field of property management. Which of the following certifications awarded by the Institute of Real Estate Management is aimed at individuals who manage larger, residential, office, industrial, or retail properties?

A) Certified Property Manager (CPM) B) Accredited Resident Manager (ARM) C) Real Property Administrator (RPA) D) Member of Appraisal Institute (MAI)

19) Real estate asset managers perform certain functions that would not be expected of asset managers who deal with stock and bond portfolios. Which of the following functions would you expect both asset managers in real estate as well as stocks / bonds to perform?

A) find specific assets in which the owners/client can invest B) monitor asset performance C) negotiate the acquisition price of assets D) oversee due diligence and closing

20) Real estate investment managers are often compensated based on the market value of assets under management. Typical asset management fees range from ______ of the estimated market value of managed assets.

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A) 0.5 to 1.5% B) 3 to 5% C) 7 to 10% D) 15 to 20%

21) A reference point that can be used as a standard to quantify the relative performance of an asset manager is more commonly referred to as a: A) corrective compensation.

B) benchmark.

C) professional designation.

D) management agreement.

22) With a performance-based management contract, an asset manager’s fees are tied directly to the rate of return earned by investors on the portfolio of managed properties relative to a benchmark. In private commercial real estate, the choice of benchmarks for performance is limited in large part to return indices provided by which of the following organizations?

A) Standard and Poor’s B) National Association of Real Estate Investment Trusts C) National Council of Real Estate Investment Fiduciaries D) Wilshire Associates

23) In contrast to maintenance and repair expenditures, which are operating expenses, the improvement decision generally involves a capital expenditure meant to increase the value of the structure. Which of the following classifications of improvements calls for the restoration of a property to satisfactory condition without changing the floor plan, form, or style of the structure?

A) rehabilitation B) remodeling C) adaptive reuse D) conversion

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24) Which of the following classifications of improvements calls for changes to the floor plan, form, or style of the structure to correct functional or economic deficiencies? A. rehabilitation A) rehabilitation B) remodeling C) abandonment D) benchmarking

25) Despite the magnitude of their real estate holdings, many non-real estate corporations have historically expended little effort to manage these assets effectively. Recently, the development of which of the following markets has helped to quell concerns related to this issue?

A) commercial mortgage backed securities (CMBS) B) sale-leaseback C) tenancy-in-common (TIC) D) installment sale

26) A property management contract establishes an agency relationship between the manager and the owner. Considering that the management fee is often calculated as a percentage of gross income, this would seem to create an agency problem in that the agreement does not give managers the incentives to control operating expenses while they attempt to increase rental income. Though seldom the case, basing the property management fee on which of the following measures would, in theory, better align the interests of the owner and manager?

A) effective gross income B) net operating income C) miscellaneous income D) capital expenditures

27) The real estate industry applies which of the following labels to individuals who are responsible for the day-to-day operations of the property.

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A) asset manager B) property manager C) leasing broker D) tenant

28) When property managers are looking to lease residential units to households whose prior history indicates a probability of long-term occupancy, they are seeking what is referred to as: A) permanence potential.

B) synergism.

C) rehabilitation.

D) adaptive reuse.

29) Someone shopping for a new suit at a department store is much more likely to stop at a nearby shoe store than a nearby bakery or drugstore. This scenario highlights the importance of which of the following determinants of the income-producing ability of the property?

A) tenant mix B) preventive maintenance C) rehabilitation D) professional designation

30) Which of the following classifications of property maintenance includes the day-to-day cleaning and upkeep required to maintain value and tenants?

A) custodial maintenance B) corrective maintenance C) preventive maintenance D) deferred maintenance

31) Which of the following classifications of property maintenance includes a program of regular inspections and care to avert potential problems.

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A) custodial maintenance B) corrective maintenance C) preventive maintenance D) deferred maintenance

32) Property managers may choose at times not to perform ordinary maintenance at the time a problem is detected in order to boost short-run NOI. This type of maintenance is more commonly referred to as: A) custodial maintenance.

B) corrective maintenance.

C) preventive maintenance.

D) deferred maintenance.

33) Decisions to improve a property are less frequent than the decisions to maintain and repair it. A conversion of a property that produces a creative use of the structure that is different from its original purpose is more commonly referred to as a(n): A) rehabilitation.

B) remodeling.

C) adaptive reuse.

D) abandonment.

34) Suppose an owner is trying to decide whether or not to make improvements to her property. Given the following information, what would be the value added or potential loss if the improvements are undertaken?

Current rent per square foot: $8.75 Anticipated rent per square foot: $14.50 Cost of improvements: $250,000 Square feet: 34,000

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A) gain of $54,500 B) loss of $54,500 C) gain of $195,500 D) loss of $195,500

35) Given the following information, calculate the leasing agent's commission in dollar terms.

Lease Term: 10 years Monthly Rent: $5,000 Commission: 3% A) $150 B) $1,500 C) $1,800 D) $18,000

36) In evaluating potential tenants for residential rental properties, a landlord may be interested in calculating the ratio of prospective rent to income for the applicant. Given the following information, calculate the rent to income ratio for the applicant.

Applicant’s Gross Annual Salary (Income): $45,000 Prospective Monthly Rent: $1,000 Applicant’s Annual Income Tax and Benefit Payments: $7,650 A) 2.22% B) 2.68% C) 26.67% D) 32.13%

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37) Suppose that a property owner plans on spending $15,000 per year over the next 5 years on maintenance and repairs. However, if she does not spend this amount, she will not be able to keep rents at market levels, vacancies will increase, and the resale value of the property in 5 years will be lower. Assume that she would lose about $7,000 a year in net income and would realize a loss of $85,000 in lower property value at the time of sale if maintenance is not maintained on the property. Determine the difference between the present value of the cost of maintaining the property and the loss to the owner if the property is not maintained assuming that the owner could earn a 7 percent return on any funds not invested in maintenance and repairs?

A) The present value of the maintenance costs is $27,802 less than the present value of the averted loss.

B) The present value of the maintenance costs is $27,802 greater than the present value of the averted loss.

C) The present value of the maintenance costs is $32,802 less than the present value of the averted loss.

D) The present value of the maintenance costs is $32,802 greater than the present value of the averted loss.

38) The property manager works under a management agreement between the property owner and the property management firm. As compensation for his duties, the property manager will negotiate a management fee. Given the following information, calculate the dollar compensation to the property manager in year 1.

Potential Gross Income of the property: $250,000 Vacancy and Collection Losses: 15% Miscellaneous Income: $50,000 Management Fee: 3% A) $4,875 B) $6,375 C) $7,500 D) $7,875

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

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27) B 28) A 29) A 30) A 31) C 32) D 33) C 34) B 35) D 36) C 37) A 38) D Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) The lease is a contract between a property owner and tenant that transfers exclusive use and possession of space to the tenant, but allows the owner to retake possession of the property at the expiration of the lease. Which type of interest allows the owner to retake possession at the end of a lease?

A) remainder interest B) reversion interest C) spousal interest D) co-ownership interest

2) As with any valid contract, enforceable leases must meet a number of requirements. One of these requirements is for each party to provide appropriate consideration. In a lease, which of the following constitutes the landlord’s consideration?

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A) promise to pay rent B) passing on legal title to the property C) permission to occupy the space or property D) commission to the leasing agent

3) Once possession and control are conveyed in a lease agreement, the owner must provide the tenant with uninterrupted use of the property without any interference from any entity that may threaten to impose upon the tenant’s leasehold interest in the property. In other words, the tenant is entitled to which of the following?

A) quiet enjoyment B) tenant improvement C) concession D) expansion option

4) For most commercial property types, lease lengths can vary considerably. Therefore, both parties must tradeoff between the advantages and disadvantages associated with particular leasing terms. Owners may prefer longer leases for all of the following reasons EXCEPT: A) delay of re-leasing costs.

B) reduction of risk associated with declining interest rates.

C) gain flexibility.

D) stability of future cash flows.

5) When securing a new tenant for a commercial rental property, the owner of the property might incur an additional expense that amounts to the cost of refurbishing the rental space to meet the needs of the tenant's business. The allocation of money for this added expense is more commonly referred to as a(n): A) tenant improvement allowance.

B) concession.

C) sublease.

D) expense stop.

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6) In contrast to rent for residential units, rent for U.S. commercial properties is typically quoted as: A) a dollar amount per month.

B) a dollar amount per year.

C) a monthly cost per square foot.

D) an annual cost per square foot.

7) In commercial leases, rents do not necessarily have to be kept constant over the life of the lease term. One option is for there to be pre-specified increases in the contract rental rate over time, sometimes referred to as “step-ups” or “escalations.” This type of rent treatment is commonly referred to as: A) flat rent.

B) graduated rent.

C) indexed rent.

D) percentage rent.

8) The choice of which method to use in constructing the contracted rental rate can be impacted by the term of the lease. With a shorter lease term, which of the following methods is most likely to be observed?

A) flat rent B) graduated rent C) indexed rent D) percentage rent

9) The choice of which method to use in constructing the contracted rental rate can also be impacted by the type of property being leased. With which of the following property types would one most expect to see a percentage rent method used?

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A) apartment B) office C) industrial D) retail

10) The rental income generated by a lease can depend significantly on the proportion of property-level operating expenses paid by the tenant. In which of the following types of leases is the tenant responsible for all operating expenses?

A) gross lease B) net lease C) net-net lease D) triple net lease

11) In which of the following types of leases is the property owner responsible for all operating expenses?

A) gross lease B) net lease C) net-net lease D) triple net lease

12) Of the following choices, which best describes the operating expenses that you would expect to be the paid by the tenant in a net lease agreement?

A) no operating expenses B) only property taxes C) both property taxes and insurance D) all operating expenses

13) Which of the following statements best describes the owner’s and tenant’s responsibility for operating expenses when there is an expense stop clause in the lease contract?

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A) The owner is responsible for operating expenses up to and above the expense stop.

B) The owner is responsible for operating expenses up to the expense stop; expenses above the expense stop become the responsibility of the tenant .

C) The tenant is responsible for operating expenses up to and above the expense stop.

D) The tenant is responsible for operating expenses up to the expense stop; expenses above the expense stop become the responsibility of the landlord.

14) A recent trend in commercial leases is for tenants to negotiate a cap on the amount of certain operating expenses they are required to reimburse the landlord. Such caps are usually negotiated on operating expenses thought to be at least partially controllable by the owner.

Which of the following would typically be considered an operating expense controllable by the owner?

A) general maintenance B) property taxes C) insurance payments D) utility expenses

15) When the supply of space exceeds the demand, it is common for owners to provide the tenant with a period of free or perhaps reduced rent. This is commonly referred to as a(n): A) tenant improvement allowance.

B) concession.

C) sublease.

D) expense stop.

16) Some tenants who are subject to long-term leases may desire to transfer all of their tenant rights and obligations to another party. This is commonly referred to as a(n): A) assignment.

B) sublease.

C) concession.

D) lease option.

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17) While a sublease and an assignment are two distinct choices for a tenant who wishes to transfer his rights during the term of a lease, both agreements: A) transfer all of a tenant’s rights to another party.

B) transfer only a subset of rights to another party.

C) grant another party the right to cancel the original lease before expiration.

D) maintain that the original tenant be held liable for fulfilling the original lease unless otherwise specified.

18) A lease option is a clause that grants an option holder the right, but not the obligation, to renew the lease, cancel the agreement, relocate within a property, or even expand to adjacent space. The existence of these options in a leasing agreement: A) reduces the expected present value of lease cash flows to the owner.

B) increases the expected present value of lease cash flows to the owner.

C) does not impact the expected present value of lease cash flows to the owner.

D) causes the expected present value of lease cash flows to equal zero.

19) A tenant who expects her business to grow may wish to have a clause included in her lease that grants her the choice to lease adjacent space as soon as it becomes available. This lease option is more commonly referred to as a: A) relocation option.

B) right of first refusal.

C) renewal option.

D) consideration.

20) The effective rent calculation is a common measure used to compare the true cost of one lease to another. While there are a number of limitations to this methodology, the effective rent calculation captures:

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A) interlease risk.

B) re-leasing costs.

C) the advantages associated with lease flexibility.

D) the time value of money.

21) The risk associated with the replacement of a tenant’s first lease with another lease of uncertain terms and conditions is more commonly referred to as: A) interlease risk.

B) pipeline risk.

C) fallout risk.

D) interest rate risk.

22) Which of the following lease options can serve to mitigate exposure to interlease risk for the tenant?

A) renewal option B) relocation option C) expense stop option D) percentage rent option

23) The majority of residential units in the U.S. are contained in multifamily structures, or apartment buildings that contain five or more housing units. Which of the following multifamily structures will range in height from four to nine stories and are typically found in both cities and suburbs?

A) high-rise apartment buildings B) midrise apartment buildings C) garden apartments D) condominiums

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24) The two most important determinants of the classification of an office property are age and obsolescence. Which of the following classes includes office buildings that are older and reasonably maintained, but are below current standards for one or more reasons?

A) class A office B) class B office C) class C office D) investment grade property

25) Retail establishments are found in a variety of forms, the simplest of which is: (Hint: fastfood franchise) A) freestanding retail outlet.

B) strip center.

C) power center.

D) regional mall.

26)

In retail property types, rents are quoted on the basis of which of the following?

A) usable area B) gross floor area C) gross leasable area D) rentable area

27) The large and generally well-known retailers who draw the majority of customers to a shopping center are more commonly referred to as: A) outlets.

B) anchors.

C) strips.

D) chains.

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28) Newer industrial parks have begun to specialize in providing space that can be configured to suit the diverse needs of various tenants. This type of industrial space is more commonly referred to as: A) warehouse.

B) plant and factory.

C) flex space.

D) research and development.

29) Lenders may request that property owners of rental properties include a clause in their lease agreement that gives the lender the right to terminate the lease and evict the tenant, even if the tenant has fulfilled all of its responsibilities under the lease, in the case that the owner of the property defaults on her mortgage. This part of the lease agreement is more commonly referred to as a: A) subordination clause.

B) non-disturbance agreement.

C) relocation option.

D) expansion option.

30) To the extent the tenant is permitted to alter the leased premises, the lease should clearly state when this may be done, and under what circumstances. The lease must also be clear about the ownership of such improvements once completed. Which of the following terms refers to items of personal property that are attached to the real property, are paid for and installed by the tenant, and may be removed by the tenant at the termination of the lease?

A) trade fixtures B) anchors C) concessions D) expense stop

31) In a net lease, the tenant is responsible for paying a clearly defined portion of the property’s operating expenses. Based on your understanding of the standard definitions of “netness” in commercial leases, the tenant is responsible for which of the following in a net-net lease?

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A) no operating expenses B) only property taxes C) both property taxes and insurance D) all operating expenses

32) In some leases, the method used to share responsibility for operating expenses is a hybrid of the four basic lease types. For example, the inclusion of which of the following clauses calls for only increases in one or more operating expenses, relative to a base year, to become the responsibility of the tenant?

A) operating expense escalation clause B) tenant improvement allowance clause C) operating expense stop clause D) subordination clause

33) Which of the following multifamily structures will typically consist of numerous two- to three-story buildings including a separate building containing a management office and clubhouse and is more common in suburban areas?

A) high-rise apartment buildings B) midrise apartment buildings C) garden apartments D) condominiums

34) Which of the following classes of the office sector includes office buildings that are considered the most prestigious in their tenancy, location, amenities and overall desirability?

A) class A office B) class B office C) class C office D) class D office

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35) Which of the following core property types includes buildings designed for the temporary storage of goods such as inventory, company records, and excess raw materials?

A) apartment B) industrial C) office D) retail

36) Given the following information, calculate the effective monthly rent payment: Lease Term: 10 years Concession: 1 year free rent to be spread over the term of the lease Rental Space: 5000 square feet Rental Rate: $20 per square foot per year Landlord's discount rate: 10% A) $4,676 B) $5,901 C) $7,081 D) $10,122

37) Let’s suppose that you have determined that the present value of a 5-year lease contract for a 10,000 sq.ft. Class C office building is $565,390. Given a discount rate of 9 percent, determine the effective rent in dollars per square foot per year if rent payments are assumed to be settled at the beginning of the month.

A) $11.65 per sq. ft. per year B) $13.98 per sq. ft. per year C) $14.08 per sq. ft. per year D) $56.34 per sq. ft. per year

38) Given the following information, calculate the load factor for this office property: Total usable area: 20,000 sq. ft.

Tenant’s prorated share of common area: 5,000 sq. ft.

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A) 0.25 B) 0.80 C) 1.25 D) 4.00

39) Assume a retail tenant is paying a base rent of $120,000 per year (or $10,000 per month).

In addition, the tenant must pay 7 percent of gross store sales in excess of $143,000 per month as percentage rent. If the store produces $170,000 in gross sales in a month, what is the total rent due for the month?

A) $10,000 B) $10,158 C) $11,890 D) $21,900

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

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27) B 28) C 29) A 30) A 31) C 32) A 33) C 34) A 35) B 36) C 37) B 38) C 39) C Student name:__________ MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) Once a specific use has been chosen for a site, the first stage in the development process, often considered the “entry ticket to development,” is: A) establishing site control.

B) feasibility analysis.

C) financing.

D) construction.

2) There are a number of ways that a developer can finance the establishment of site control, each with its own advantages and disadvantages. Which of the following methodologies calls for only the initial land rent to be paid out before development actually gets under way?

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A) joint venture B) option C) contract for deed D) ground lease

3) Since the architect can be involved in various stages of the development process, there are a number of methods used to compensate him for his services, each of which may depend on the particular phase of development. If the architect provides pre-design services or schematics early in the development process, he will typically be compensated: A) on an hourly basis.

B) as a percentage of construction expenses.

C) by a fixed fee plus expenses.

D) only if he stays on the project through completion of the construction phase.

4) A developer’s selection of an architect is a vital step in the development process as the architect fulfills a number of important roles throughout the life of the project. As compensation for contributions in the design phase, the architect is often given a percentage of the construction cost. For moderately complex designs, the average compensation will be: A) 1 to 2%.

B) 3 to 7%.

C) 7 to 10%.

D) greater than 10%.

5) As compensation for contributions in the design phase, the architect is often given a percentage of the construction cost. For simple garden apartment designs, the average compensation will be: A) 1 to 2%.

B) 3 to 7%.

C) 7 to 10%.

D) greater than 10%.

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6) The strength of a successful developer lies in his or her ability to select design professionals and engineers that play vital roles in the project’s plan and completion. Which of the following individuals would be most concerned, on a general level, with the design aesthetics, optimal use and preservation of the site, traffic flows, utility systems and drainage systems?

A) land planner B) landscape architect C) mechanical engineer D) environmental agent

7) The expertise of several types of engineers must be coordinated by the architect in bringing together the final structure design. Which of the following types of engineers is responsible for specifications to achieve safety and stability for a structure’s foundation?

A) soils engineer B) structural engineer C) mechanical engineer D) civil engineer

8) Development involves a complex organization of many moving parts. Which of the following choices is often viewed as the single greatest cause of project delays and cost overruns?

A) obtaining permits B) financing C) effective communication between developer, architect, and engineer D) selecting the architect

9) The majority of financing for the acquisition of land for development is most likely to come from which of the following parties?

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A) developer B) banks C) pooled equity of a limited liability corporation (LLC) D) insurance companies

10) The developer will face a variety of costs throughout the project’s life. Which of the following would be classified as a soft cost?

A) legal fees of the permitting process B) costs of materials C) labor cost of subcontractors for construction D) cost of land

11) In each stage of the development process, the developer faces risks that can have a profound impact on the success of the particular project. Which of the following risks is of primary concern after the construction phase has been completed?

A) environmental risk B) title risk C) market risk D) permitting risk

12) Since banks seldom loan 100 percent of construction costs, developers often turn to mezzanine financing to obtain necessary funds. With mezzanine debt, which of the following entities is typically pledged as collateral to the lender?

A) land B) ownership shares in the development entity C) personal assets of the developer D) construction materials

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13) When construction costs exceed the amount of the construction loan, a developer may seek to cover the gap using mezzanine financing. All of the following statements regarding mezzanine debt are true EXCEPT: A) mezzanine debt use is less expensive than normal construction financing.

B) mezzanine debt use avoids dilution of equity returns.

C) mezzanine debt use is less expensive than equity financing.

D) ezzanine debt use avoids the foreclosure process in the case of default.

14) While the risks of construction lending may be less in a number of respects than those associated with land acquisition, banks still require a premium in their lending rate as compensation for the risks involved. For construction loans, banks typically require a premium above LIBOR that ranges from: A) 0-50 basis points.

B) 50-150 basis points.

C) 150-250 basis points.

D) 250-350 basis points.

15) Even the smallest building project involves a multitude of separate contractors to complete construction. Therefore, it becomes difficult for the developer to monitor the construction process. Which of the following individuals serves as the developer’s liaison and representative on the project site?

A) general contractor B) construction manager C) land planner D) subcontractor

16) Companies or individuals who provide specialized construction activities such as installation of heating, ventilating, and air conditioning systems during the construction process are more commonly referred to as:

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A) general contractors.

B) construction managers.

C) land planners.

D) subcontractors.

17) In more complex development projects, a developer may choose to combine the roles of the architect and general contractor into one in order to mitigate design-cost conflicts that otherwise must be negotiated when plans are revised. This arrangement is more commonly referred to as a: A) build-to-suit.

B) subordination agreement.

C) design-build.

D) fast-track.

18) While uncertainties involving the multitude of players and stages in the development process provide a great deal of risk, market cycles tend to compound these risks. Out of the four phases of a market cycle, which would be the most desirable point for a developer to enter the market?

A) trough B) expansion C) peak D) decline

19) With a site under control, the developer will begin to evaluate the feasibility of the project. The main tool that a developer will use in determining the financial feasibility of a project is: A) net present value (NPV) analysis.

B) cost approach to valuation.

C) repeat-sales approach.

D) direct capitalization.

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20) With a multitude of players involved in the development process, it is important to understand where they participate within the various stages of development. Which of the following individuals is the least likely to be involved in the design stage of development?

A) general contractor B) landscape architect C) civil engineer D) land planner

21) Suppose that a developer pre-leases space to a financially strong, national tenant such as Home Depot, without having yet built the structure in which they will be leasing space. This is more commonly referred to as a: A) ground lease.

B) build-to-suit.

C) design-build.

D) contract for deed.

22) Suppose that a development group would like to determine if the local zoning and landuse ordinances will permit the type of development they desire. However, they do not want to be obligated to purchase the property if they find that their proposed development will not be permitted. To gain control of the site without being obligated to perform, the development group should purchase which of the following?

A) ground lease B) option C) fast-track D) floor loan

23)

The construction lender generally expects his or her loan to be paid off in:

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A) less than 1 year.

B) 2-3 years.

C) 5-10 years.

D) more than 10 years.

24) After construction has been completed, a developer may decide to seek additional financing. If current interest rates are relatively high, but the developer expects them to decline in the near future, the developer would most likely seek financing in the form of a: A) subordination agreement.

B) miniperm loan.

C) take-out commitment loan.

D) floor loan.

25) As an alternative to gap financing, a developer may form a contract with a construction lender that ultimately makes the original construction lien inferior to the lien securing a subsequent loan. This contract is more commonly referred to as: A) subordination agreement.

B) miniperm loan.

C) take-out commitment loan.

D) floor loan.

26) In considering the main components of a construction budget, which costs would be expected to constitute the largest portion of a development project’s expense?

A) land costs B) hard construction costs C) soft construction costs D) marketing costs

27) Based on your understanding of the relation between risk and the phases of an income producing property’s life, which phase would you expect to entail the highest risk?

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A) development and construction phase B) lease-up stage C) stable operation phase D) All three stages of a property’s life have similar and equal risk.

28) The second stage of the development process requires an analysis of the project’s feasibility. The developer will typically begin this stage of the development process with which of the following types of analysis?

A) financial feasibility B) environmental feasibility C) legal feasibility D) political feasibility

29) For all but the largest of developers, the marketing and leasing of the project will be through an external broker. Given their special knowledge of the target market, it would be most beneficial for the developer to bring the broker into the development process during which of the following stages?

A) design B) financing C) construction D) operation

30) Which of the following individuals focuses on the topography, soil, and vegetation that are the context for a structure, with the goal of giving a harmonious and enhancing immediate setting for the structure?

A) land planner B) landscape architect C) mechanical engineer D) environmental agent

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31) Which of the following types of engineers is responsible for determining the requisite skeleton to maintain the building’s integrity?

A) soils engineer B) structural engineer C) mechanical engineer D) civil engineer

32) Which of the following types of engineers is responsible for providing specifications and design for the HVAC system and other building systems?

A) soils engineer B) structural engineer C) mechanical engineer D) civil engineer

33) Which of the following types of engineers is responsible for designing the power sources and distribution system?

A) electrical engineer B) structural engineer C) mechanical engineer D) civil engineer

34) Which of the following types of engineers is responsible for designing on-site utility systems, including sewers, water, streets, parking, and site grading?

A) electrical engineer B) structural engineer C) mechanical engineer D) civil engineer

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35) The construction budget has six main components: land costs, hard costs, construction soft costs, marketing soft costs, developer’s fee, and total construction financing costs. Which of the following would be considered a hard cost?

A) carry costs B) costs of material for construction C) legal fees of the permitting process D) developer fees

36) The construction budget has six main components: land costs, hard costs, construction soft costs, marketing soft costs, developer’s fee, and total construction financing costs. Which of the following types of costs typically constitute the greatest proportion of the project’s construction budget?

A) land costs B) hard costs C) construction soft costs D) construction financing costs

37) When a developer decides to break down the project design into sequential phases and begins construction before the last phases of the design are complete, this procedure is more commonly referred to as: A) build-to-suit construction.

B) coordination construction.

C) design-build construction.

D) fast-track construction.

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

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27) A 28) A 29) A 30) B 31) B 32) C 33) A 34) D 35) B 36) B 37) D

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