REAL 5090 Test 2

What is the difference between NOI and PBTCF?

capital improvement expenditures and leasing commissions

in the 2006 peak, why were cap rates so low?

because prices were too high

if the loan to value ratio is 80% what is the leverage ratio?

5

T/F: income growth in commercial real estate does not meet, let alone exceed, inflation

TRUE

what is wrong with the following statement?

Only a fool would invest in real estate without financing most of the purchase with a mortgage; borrowing allows the investor to increase their expected return by using other people's money.

it ignores the effect of borrowing on investors' risk

why do transaction prices deviate a lot from expected market values?

a buyer's investment value can be higher than the market value, increasing the transaction price

free cash flows that a property generates are ____________ of the price you pay for a property

independent

which of the following investments is best assuming a 1 year holding period and a 9% discount rate?

1. 20M investment that earns 11% for the year

2. 7M investment that earns 14% for the year

1. because it has a higher NPV

T/F: zero NPV projects are okay and are actually expected

TRUE because usually buyers and sellers end up converging to the same market value

what is an example of Capex?

- tenant improvements

- leasing commissions

- replacement of major appliances/utilities (ex: HVAC system)

- new landscaping

- replacing the roof

what is the typical relationship between expected going in and going out cap rates?

going out rate should be at least as high as the going in rate

should you include property management fees in a pro forma?

ALWAYS because even if the investor is managing the property themselves, this accounts for the opportunity cost of time

According to exhibit 11-7 in the textbook, why is IRR-OAR > 0?

- too low of an investment in capital expenditures

- too high of inflation/growth in rents

- less real depreciation of the building

which of the following is NOT an operating expense:

tax expense

insurance expense

real depreciation expense

utility expense

depreciation expense

with risk-less debt, if the return risk is 15% with a 60% LTV, with a 80% LTV, what is the return risk?

30%

T/F: vacancy allowances tend to decrease over time as buildings age

FALSE

what is the cash-on-cash yield if the cap rate is 7.5%, the mortgage constant is 5%, and the LTV is 75%?

A. 1.5%

B. 2.5%

C. 10%

D. 14%

E. some other amount

E. some other amount

Which of the following statements is false?

A. the value of CRE investments is derived from earning potential after current leases expire

B. Proformas match the expected holding period even if that holding period is for a short time period such as 2-3 years

C. operating cash flows and reversion cash flows are two types of CFs

D. More than 1 statement is false

B. Proformas match the expected holding period even if that holding period is for a short time period such as 2-3 years

If given an initial NOI, required return, and expected NOI growth, how do you find NPV?

(NOI / return - growth) - initial investment

An investor wants a return greater than 9% and the return on debt is 4%. what return will the investor earn at an 60% LTV?

16.5%

T/F: with riskless debt, the risk of total, growth, and income returns are directly proportional to the LTV

FALSE. they are proportional to the LR

what are some common mistakes when creating DCFs?`

- assuming current leases will renew, therefore not making new considerations for vacancies

- increasing a lease payment growth rate that is over inflation

The NOI for a property is $400,000, the value is $5M, the mortgage constant is 9% and the LR is 4. What is the cash-on-cash return?

+5%

what are some problems with inflating both the numerator and denominator of the right-hand side ratios of a DCF?

- if you increase the discount rate, the total return will be higher than expected

- if you assume a unrealistic total return, you might incorrectly allocate capital

- if you inflate too much, it can undermine the credibility of the DCF

An investor desires a 14% return and the return on the property is 9%. The cost of debt is 4%. What is the LTV for this scenario?

50%

how can the private property market be segmented?

it can be segmented by investor clienteles

the current risk premium is 4.5% but the expected risk premium is 9%. what is the LR?

2

why is NPV ALWAYS better than IRR?

it is based off the wealth maximization principle

which of the following is proportional to LR when debt is riskless?

A. Total risk

B. Equity risk premium

C. Risk of income yield

D. Risk of growth yield

E. all of the above

e. all of the above

how do you calculate the reversion value?

NOI for next year / going out cap rate

what is the typical Capex budget?

10-20% of NOI

100-200 basis points

1-2%