MGMT 170 Midterm

The most common reason for a borrower to default on a real property loan is:

a) failure to pay insurance and property taxes when due

b) failure to pay points and closing costs when due

c) failure to pay loan servicing fees when due

d) failure to pay principal and interest when due

d) failure to pay principal and interest when due

A utility easement gives its holder the right to:

a) own, possess and use the land where its pipes or wires run over, under or through a property

b) drill anywhere on a property owner's land to install utilities at the property

c) use or access land owned by someone else for a limited purpose

d) fee simple absolute rights to real property if it is for a public purpose

c) use or access land owned by someone else for a limited purpose

Real estate buyers should purchase title insurance at the time of acquisition:

a) To insure the buyer for any and all claims that may be made against the title to the property

b) To insure the buyer for covered claims against the title in the amount of the purchase price

c) To insure the lender from title claims made after the loan has been repaid

d) To remove all known and unknown title defects before acquisition

b) To insure the buyer for covered claims against the title in the amount of the purchase price

For a seven year office building lease to be enforceable under the Statute of Frauds, the lease must be:

a) In a written agreement that was signed only by the landlord

b) In a written agreement that was signed only by the tenant

c) In a written agreement that was signed by both the landlord and the tenant

d) In an oral agreement that was mutually agreed to by the landlord and the tenant

c) In a written agreement that was signed by both the landlord and the tenant

Roof tiles that are designed to be permanently installed on apartment building roods are:

a) Personal property both before and after installation on an apartment building roof

b) Real property both before and after installation on an apartment building roof

c) Personal property before but real property after installation on an apartment building roof

d) Real property before but personal property after installation on an apartment building roof

c) Personal property before but real property after installation on an apartment building roof

When comparing a 15-year fully amortizing fixed rate mortgage loan to a 30-year fully amortizing fixed rate mortgage loan of the same principal amount from the same lender originated at the same time, the 30-year fully amortizing fixed rate mortgage loan will have:

a) a lower annual rate

b) Less total interest paid over the life of the loan

c) Higher monthly payments

d) Slower amortization of the principal balance

d) Slower amortization of the principal balance

An adjustable rate mortgage loan with a teaser rate of 1.5% for the first loan year, an index of six-month LIBOR, a margin of 2.5%, a periodic interest rate increase cap of 1.0% and a lifetime interest rate increased cap of 5.0% with semi-annual adjustments, would have a maximum interest rate of what for the first half of the third loan year if the six-month LIBOR rate is 3.0% at the interest rate rest date just before the beginning of the third loan year?

a) 3.0%

b) 4.5%

c) 5.5%

d) 6.5%

b) 4.5%

An ARM loan with a teaser rate of 1.0% for the first loan year, an index of the one-year U.S. Treasury, a margin of 2.%, a periodic interest rate increase cap of 2.0% and a lifetime interest rate increase cap of 5.5% with annual adjustments, would have a maximum interest rate of what for the fourth loan year if the one-year U.S. Treasury rate is 4.75% at the interest rate reset date just before the beginning of the fourth loan year?

a) 6.50%

b) 6.75%

c) 7%

d) 7.25%

use the Adjustable Rate Loans on Excel

a) 6.50%

The most commonly used reference indices for adjustable rate home loans currently are:

a) The Prime rate and 11th District COFI

b) U.S. Treasuries and the Prime rate

c) SOFR and U.S. Treasuries

d) The Federal Funds rate and LIBOR

c) SOFR and U.S. Treasuries

The economic impacts from COVID-19 pandemic have put significant financial stress on many borrowers, some of whom may not be able to make their monthly mortgage payments. If a borrower fails to pay the monthly principal and interest due on an $850,000 30-year fully amortizing fixed rate jumbo mortgage loan, then all the following will be true, EXCEPT:

a) The borrower will be in default and the property that secures the repayment of the loan might end up in foreclosure

b) The loan will have negative amortization

c) The interest rate on the loan will be automatically reduced

d) The principal balance of the loan will increase

c) The interest rate on the loan will be automatically reduced

Since the Great Recession of 2008-2009, interest rates have fallen substantially and, due to the monetary and fiscal policy responses to the COVID-19 pandemic, interest rates are now at their all-time lows. If a borrower believed that interest rates would rise significantly in the future, she should:

a) Finance with a short-term fixed rate interest-only recourse loan

b) Finance with a long-term fully amortizing fixed rate non-recourse loan

c) Finance with a short-term Prime based floating rate loan

d)Finance with a long-term LIBOR based ARM loan with semi-annual adjustments

b) Finance with a long-term fully amortizing fixed rate non-recourse loan

A mortgage lender was about to foreclose on a $600,000 home loan at a time when the home's value had fallen to $500,000. The lender wanted to pursue a foreclosure sale of the property securing the loan to receive the net cash proceeds from the sale and to obtain a deficiency judgement against the borrower for the shortfall between the net cash proceeds from the foreclosure sale and the outstanding principal balance owing on the loan plus the costs of the foreclosure process. Under what circumstances might the the lender be able to obtain a deficiency judgement?

a) If the loan is a purchase money home loan in a state that protects such loans from a deficiency judgment

b) If the lender pursues a non-judicial trustee's sale of the property to expedite the foreclosure process

c) If the loan documents have language that says that the loan is non-recourse to the borrower

d) If the lender pursues a judicial foreclosure of the loan and there is recourse language in the loan documents

d) If the lender pursues a judicial foreclosure of the loan and there is recourse language in the loan documents

In periods of "easy money", lenders underwrite loans with:

a) Higher LTVs and higher DSCRs

b) Lower LTVs and higher DSCRs

c) Lower LTVs and lower DSCRs

d) Higher LTVs and lower DSCRs

d) Higher LTVs and lower DSCRs

Union Bank hired a real estate appraiser in October 2021 to deliver its opinion of the market value of a 260,000 square foot industrial property located in Ontario, California that was originally built in 1958 but was recently renovated and leased entirely to Amazon for one of its regional distribution centers with a long-term triple-net lease.

The appraiser should:

a) Focus primarily on the "replacement cost" approach to valuation given the old age of the property

b) Focus primarily on the "capitalization of income" approach to valuation given that the property is an income-producing property with a long-term lease to a creditworthy tenant

c) Rely primarily on the "gross rent multiplier" method given that this industrial property has only a single tenant with a triple net lease

d) Ignore the "comparable sales" method as it is used only for appraising residential homes

b) Focus primarily on the "capitalization of income" approach to valuation given that the property is an income-producing property with a long-term lease to a creditworthy tenant

State recording statutes typically provide that a lender who fails to record a mortgage or deed of trust in connection with a real property loan:

a) Cannot sue the borrower for failure to repay the loan in the event of a loan default by the borrower

b) Will lose the priority of its mortgage or deed of trust to a subsequent lender who records its mortgage or deed of trust against the property first

c) Will automatically forfeit any unpaid principal balance owed under the promissory note in the event of a foreclosure of the property

d) Can always foreclose on the property even if the borrower fully repays the loan

b) Will lose the priority of its mortgage or deed of trust to a subsequent lender who records its mortgage or deed of trust against the property first

In December 2019, an apartment building in San Diego, California was purchased for $22,000,000 that had gross annual revenue of S1,770,000 and annual expenses of $750,000. The buyer financed the purchase price with a $16,500,000 first mortgage loan at 5.0% interest-only that was due in 7 years. The cap rate at the time of

purchase:

a) Must exceed the contract interest rate on the mortgage loan for there to be positive cash flow

b) Was equal to the property's annual NOI divided by the property's purchase price

c) Was lower than the contract interest rate on the loan, so the property will produce negative cash flow if the

debt service coverage ratio is greater than 1.0

d) Was equal to the property's purchase price divided by the property's annual NOI

b) Was equal to the property's annual NOI divided by the property's purchase price

What is the APR on a $700,000 fixed rate mortgage loan fully amortizing over 30 years if the stated annual interest rate is 5.5% and the lender charges 1.5% as an origination fee, $750 for an appraisal and $18 for a credit report?

a) 5.36%

b) 5.5%

c) 5.65%

d) 5.72%

c) 5.65%

In the majority of states where lenders can choose to use either a deed of trust or a mortgage to secure the repayment of their real estate loans, lenders prefer to use a deed of trust for all the following reasons, EXCEPT:

a) Fewer parties are involved in a deed of trust

b) Deeds of trust allow for the possibility of an out-of-court trustee's sale of the property

c) Foreclosure is typically faster and cheaper with a deed of trust

d) A deed of trust gives the lender the choice to pursue either a judicial or a non-judicial foreclosure

a) Fewer parties are involved in a deed of trust

A retail property investor bought a 72,000 square foot shopping center in Inglewood, California with a 25-year fully amortizing fixed rate mortgage loan at a stated annual interest rate of 5.5%, a loan to value ratio of 80%, and a down payment of $600,000. What was the purchase price of the property?

a) $480,000

b) $750.000

c) $2.400.000

d) $3.000.000

d) $3.000.000

A retail property investor bought a 72,000 square foot shopping center in Inglewood, California with a 25-year fully amortizing fixed rate mortgage loan at a stated annual interest rate of 5.5%, a loan to value ratio of 80%, and a down payment of $600,000. What was the monthly payment on the loan?

a) $3,684.52

b) $11.790.48

c) $14,738.10

d) $18,422.62

c) $14,738.10

A shopping center's first year annual NOI is projected to be $777,000, the property's acquisition cap. rate is 7.0%, and the lender's maximum LTV is 70% of the purchase price. What is the maximum loan amount that can be borrowed against the property?

a) $3,330,000

b) S7,770.000

c) $11,100.000

d) $15,857,143

b) S7,770.000

A shopping center's first year annual NOI is projected to be $777,000, the property's acquisition cap rate is 7.0%, the lender's maximum LTV is 70% of the purchase price, and the lender also requires an initial DSCR of 1.25 and an annual interest rate of 7.0% on a 25-year fully amortizing fixed rate mortgage loan that is payable

monthly. What is the maximum loan amount that can be borrowed against the property?

a) $3,330,000

b) $7,329,022

c) S7.770.000

d) S7.785 932

b) $7,329,022

use DSCR ratio in Key Concepts

If you are planning to buy a fully leased apartment building in Glendale, California at an acquisition cap rate of 5.0%, and you finance a portion of the purchase price with a 10-year interest-only loan at a fixed annual interest rate that is lower than the 5.0% acquisition cap rate, and the loan has no points, fees or other closing

costs, then the before tax ROE for your investment will be:

a) Lower than the acquisition cap rate

b) Unaffected by the interest rate on the loan

c) Higher than the acquisition cap rate

d) Depends on the DSCR

c) Higher than the acquisition cap rate

If you are planning to buy a fully leased apartment building in Glendale, California at an acquisition cap rate of 5.0%, and you finance a portion of the purchase price with a 10-year interest-only loan at a fixed annual interest rate that is lower than the 5.0% acquisition cap rate, and the loan has no points, fees or other closing

costs, then the before tax ROE for your investment will:

a) Decrease as the LTV ratio is increased

b) Increase as the LTV ratio is increased

c) Increase as the LTV ratio is decreased

d) Depends on the DSCR

b) Increase as the LTV ratio is increased

All of the following will affect the market rent for a shopping center in Skokie, Illinois, EXCEPT:

a) The global, national, and local economic situation

b) The contract interest rate on the shopping center's existing first mortgage loan

c) Competition from other shopping centers in the local market

d) The amount of violent crime recently committed in that neighborhood

b) The contract interest rate on the shopping center's existing first mortgage loan

Safer investments will generally:

a) Deliver consistently higher returns

b) Generate much better risk-adjusted returns

c) Produce less predictable returns

d) Have less variability of projected returns

d) Have less variability of projected returns

Falling interest rates typically:

a) Increase cap rates and reduce property values

b) Reduce cap rates and increase property values

c) Increase cap rates and increase property values

d) Reduce cap rates and reduce property values

b) Reduce cap rates and increase property values

Real estate investments can change substantially in value over time due to a variety of factors. An investor equity in a property will always increase if there is:

a) Price appreciation and negative loan amortization

b) Price depreciation and positive loan amortization

c) Price appreciation and positive loan amortization

d) Price depreciation and negative loan amortization

c) Price appreciation and positive loan amortization

Millions of borrowers found themselves in financial distress during the Great Recession of 2008-2009, and many borrowers defaulted on their real estate loans. If a lender chose to pursue a judicial foreclosure rather than a non-judicial foreclosure in an attempt to recover the maximum amount on one of their defaulted mortgage loans with an unpaid principal balance of $9,800,000 (including accrued interest, attorneys' fees and other lender costs incurred up to the time of the foreclosure sale), and the property sold for only $8,000,000 (net of all fees and closing costs) at the foreclosure sale: a) The lender might get a deficiency judgment for $1,800,000 if

a) the loan is non-recourse

b) The lender might get a deficiency judgment for $8,000,000 if the loan is non-recourse

c) The borrower might get a deficiency judgment for $8,000,000 if the loan is recourse

d) The lender might get a deficiency judgment for $1,800,000 if the loan is recourse

d) The lender might get a deficiency judgment for $1,800,000 if the loan is recourse

The borrower under a deed of trust is the:

a) Trustor

b) Trustee

c) Escrow

d) Beneficiary

a) Trustor

Two potential real estate investments are under review by an investment firm. One is a 75,000 square foot office building in Portland, Oregon with a projected pre-tax leveraged IRR of 18.8% and the other is a 54-unit apartment building in Scranton, Pennsylvania with a projected pre-tax leveraged IRR of 14.5%. They should:

a) Choose the Portland industrial building with the higher expected IRR because it will generate more pre-tax income

b) Choose the Scranton apartment building with the lower expected IRR because it must be a safer investment

c) Choose neither investment because both Is seem too good to be true in today's market

d) Carefully weigh the projected returns relative to the potential risks of each investment during the due diligence process to determine whether either investment should be chosen

Carefully weigh the projected returns relative to the potential risks of each investment during the due diligence process to determine whether either investment should be chosen

The following are all TRUE regarding a mechanic's lien, EXCEPT?

a) Gives contractors and materials

suppliers the right to attach a lien on real estate

b) Remains valid even after all contracts for labor and materials have been fully paid

c) Can lead to a judicial foreclosure sale of the property if the mechanic's bills are left unpaid

d) Gives constructive notice of the mechanic's lien if properly recorded in the public records

b) Remains valid even after all contracts for labor and materials have been fully paid

If a shopping center lease requires that the tenant pay more rent when the tenant's sales volume increases over a certain amount, the additional rent is called:

a) Pass through rent

b) Triple net rent

c) Percentage rent

d) CPI rent

c) Percentage rent

An elderly couple living in Boca Raton, Florida wanted to supplement their monthly Social Security income by tapping the substantial equity in their home. The couple had paid off their home mortgage loan years ago and they recently had their home appraised for $2.2 million. If they put a reverse annuity mortgage loan on their home in order to receive monthly payments of S3,600 from the lender, and if the lender's RAM program currently charges a 6.0% fixed annual interest rate compounded monthly, what would be the RAM loan balance when the surviving spouse dies after 18 years if the maximum loan amount is capped at 75% of the recent

appraised value?

a) $474,832

b) $1,394,472

c) $1,468,875

d) $1,650,000

b) $1,394.472

An investor bought a beautifully restored 36-unit apartment building in Healdsburg, California in 2017 for $8,000,000 with a 75% LTV fixed rate fully amortizing first mortgage loan that had a 3 year lockout on

prepayment. By 2020, the apartment building had increased in value to almost $12,000,000 due to the continuing growth in the local economy and falling cap rates. Because of the prepayment lockout, the investor could not refinance the first mortgage loan, so she instead found a lender who would place a $2,000,000 second

mortgage loan on the property. The interest rate charged by the second mortgage lender would likely be:

a) The same as the rate on the underlying first mortgage loan

b) Lower than the rate on the underlying first mortgage loan

c) Unrelated to the risk of the second mortgage loan

d) Higher than the rate on the underlying first mortgage loan

d) Higher than the rate on the underlying first mortgage loan

If a $750,000 30-year fully amortizing fixed rate mortgage loan from City National Bank has an annual interest rate of 3.75% with a monthly payment of $3,473.37, and a $750,000 15-year fully amortizing fixed rate mortgage loan from Wells Fargo Bank has an annual interest rate of 2.75% with a monthly payment of $5,089.66, a borrower should:

a) Choose the 30-year fixed rate loan from City National Bank because of the lower monthly payments

b) Choose the 15-year fixed rate loan from Wells Fargo because of the lower interest rate

c) Choose a 7-year adjustable rate interest-only loan from PNC Bank instead with a low teaser interest rate of 1.0% for the first loan year

d) Make a careful analysis of all the terms and conditions of the available loans to determine which loan is better for that borrower under the circumstances, or if another loan or lender should be considered

d) Make a careful analysis of all the terms and conditions of the available loans to determine which loan is better for that borrower under the circumstances, or if another loan or lender should be considered

If a Target anchored shopping center's owner wanted to increase her property's net operating income, she should do all the following, EXCEPT:

a) Reduce the expense stops in new leases

b) Reduce the property's operating expenses

c) Increase percentage rent collections

d) Increase the debt service costs

d) Increase the debt service costs

A UCLA law student saved $50,000 for the down payment on a $750,000 condominium. She can obtain either a $700,000 fully amortizing 30-year fixed rate first mortgage loan at 3.75% from Citibank, or she can obtain a $600,000 fully amortizing 30-year fixed rate first mortgage loan at 3.25% combined with a $100,000

fully amortizing 30-year fixed rate second mortgage loan at 6.5% from online mortgage lender Quicken Loans Is the S700,000 first mortgage loan from Citibank preferred or the $600,000 first mortgage with a $100,000 second mortgage loan package from Quicken Loans?

a) Single loan from Citibank

b) Loan package from Quicken Loans

c) No difference because the monthly payments are almost identical

d) Depends on all the terms and conditions of the first mortgage loan from Citibank as compared to the terms and conditions in the first and second mortgage loans from Quicken Loans

d) Depends on all the terms and conditions of the first mortgage loan from Citibank as compared to the terms and conditions in the first and second mortgage loans from Quicken Loans

If you are considering buying a three-bedroom, two-bathroom condominium for $500,000 in Tarzana, California to be used as a rental property on Airbnb with a $450,000 fully amortizing 30-year first mortgage loan at a 3.75% fixed annual interest rate from Bank of America, and if the promissory note documenting the loan includes a 2% prepayment penalty clause, which of the following will be TRUE regarding the APR on the loan:

a) The APR will be lower than the contract interest rate if the lender charges one point at loan closing and $500 for an appraisal

b) The APR will be lower than the effective yield to the lender if the loan is paid off before the maturity date

c) The APR will be higher than the effective yield to the lender if the loan is refinanced before the maturity date

d) The APR will be higher than the contract interest rate if the loan has no points and no closing costs

b) The APR will be lower than the effective yield to the lender if the loan is paid off before the maturity date

When applying the "replacement cost" approach to valuation, a real estate appraiser will evaluate many economic and physical factors to assess the depreciation in a building's value as compared to new construction. Those appraisal factors might include all the following, EXCEPT:

a) Physical deterioration

b) Functional obsolescence

c) Tax depreciation

d) External obsolescence

c) Tax depreciation

What is the effective yield to the lender through the date of prepayment on a $383,000 fixed rate mortgage loan fully amortizing over 30 years but paid off after 10 years if the stated annual interest rate is 3.50%, the lender charges 1.5% as an origination fee, $360 for an appraisal and $15 for a credit report and there is no prepayment penalty?

a) 3.39%

b) 3.50%

c) 3.63%

d) 3.71%

d) 3.71%

An investor is under contract to buy a 2,000,000 square foot fully leased industrial park in Charleston, South Carolina as an investment at a price of S60,000,000. There are 12 tenants, each of which has a fifteen-year lease at a flat rental rate of $0.25 per square foot per month with an expense stop of $0.05 per square foot per month

Total annual operating expenses for the building are currently $1.20 per square foot per year. There is a ten-year interest-only mortgage loan with a principal balance of $40,000,000 at a 4.5% fixed annual interest rate that has six years remaining until the maturity date. The building/land ratio for tax depreciation purposes is 75/25. What

is the acquisition cap. rate?

a) 10.00%

b) 8.00%

c) 7.00%

d) 6.00%

b) 8.00%

An investor is under contract to buy a 2,000,000 square foot fully leased industrial park in Charleston, South Carolina as an investment at a price of S60,000,000. There are 12 tenants, each of which has a fifteen-year leaseat a flat rental rate of $0.25 per square foot per month with an expense stop of SO.05 per square foot per month

Total annual operating expenses for the building are currently $1.20 per square foot per year. There is a ten-year interest-only mortgage loan with a principal balance of $40,000,000 at a 4.5% fixed annual interest rate that has six years remaining until the maturity date. The building/land ratio for tax depreciation purposes is 75/25. What

is the annual before tax cash flow?

a) $6,000,000

b) $3,600,000

c) $3,000,000

d) $2,400,000

c) $3,000,000

An investor is under contract to buy a 2,000,000 square foot fully leased industrial park in Charleston, South Carolina as an investment at a price of $60,000,000. There are 12 tenants, each of which has a fifteen-year lease at a flat rental rate of $0.25 per square foot per month with an expense stop of $0.05 per square foot per month.

Total annual operating expenses for the building are currently $1.20 per square foot per year. There is a ten-year interest-only mortgage loan with a principal balance of $40,000,000 at a 4.5% fixed annual interest rate that has six years remaining until the maturity date. The building/land ratio for tax depreciation purposes is 75/25. What

is the annual tax depreciation?

a) $1,636,362

b) $1,538,462

c) $1,153,846

d) $384,616

c) $1,153,846

An investor is under contract to buy a 2,000,000 square foot fully leased industrial park in Charleston, South Carolina as an investment at a price of $60,000,000. There are 12 tenants, each of which has a fifteen-year lease at a flat rental rate of $0.25 per square foot per month with an expense stop of S0.05 per square foot per month.

Total annual operating expenses for the building are currently $1.20 per square foot per year. There is a ten-year interest-only mortgage loan with a principal balance of $40,000,000 at a 4.5% fixed annual interest rate that has six years remaining until the maturity date. The building/land ratio for tax depreciation purposes is 75/25. What

is the property's taxable income?

a) $3,000,000

b) $2,923,076

c) $1,846,154

d) $1,292,308

c) $1.846.154

If a lender wants to achieve an APR of approximately 3.375% on a 25-year fully amortizing fixed rate loan for $550,000 with a stated annual interest rate of 3.0%, how many points should the lender charge the borrower?

a) 3

b) 4

c) 5

d) 6

b) 4

A borrower applied for a $14.4 million 30-year fully amortizing fixed rate partially recourse mortgage loan that was due in 10 years to acquire a beautiful new $18 million 36-unit apartment building in Santa Monica, California. The lender should be very thorough in underwriting the many risk factors relating to the loan, and

the most important risk factor relates to:

a) The location of the property

b) The replacement cost of the property

c) The sales prices for comparable properties

d) The ability of the borrower to repay that mortgage loan

d) The ability of the borrower to repay that mortgage loan

When a borrower pays less than the required monthly amount on a mortgage loan, the borrower will be in default and the loan will have negative amortization if the amount actually paid that month is:

a) Less than the amount of accrued interest due that month

b) More than the amount of accrued interest due that month

c) Less than the amount of principal amortization due that month

d) More than the amount of principal amortization due that month

a) Less than the amount of accrued interest due that month

Real estate buyers usually prefer to acquire investment properties with higher LTV loans in a low interest rate environment for all the following reasons, EXCEPT:

a) The higher leverage should increase the ROE on the

investments

b) The higher LTV loans will reduce the amount of cash equity required for the investments

c) The higher LTV loans will reduce the likelihood of mortgage defaults

d) The higher leverage will likely increase the before tax IRR

c) The higher LTV loans will reduce the likelihood of mortgage defaults

What is the DSCR for a $27 million class B office building in Riverside, California with an $18 million 5 year interest-only first mortgage loan at a 6.0% annual interest rate that produces an 8.0% before tax annual

return on equity?

a) 0.6

b) 1.5

c) 1.67

d) 2.5

c) 1.67