Finance 4500 Exam 5 (Hegger)

Income multipliers

A. are useful as a preliminary analysis tool to screen out obviously unacceptable investment opportunities.

B. are adequate as the sole indication of a property's investment worth.

C. relate the property's price or value to after-tax cash flow.

D. None of these choices are correct.

A. are useful as a preliminary analysis tool to screen out obviously unacceptable investment opportunities.

The overall (going-in) capitalization rate calculated on a potential acquisition

A. is the reciprocal of the effective income multiplier.

B. is higher if CAPX are treated in an above-line fashion.

C. should reflect the risk associated with an investment opportunity.

D. All of these choices are correct.

C. should reflect the risk associated with an investment opportunity.

The operating expense ratio

A. highlights the relationship between net operating income and operating expenses.

B. shows the percentage of potential gross income consumed by operating expenses.

C. expresses operating expenses as a percent of effective gross income.

D. should reflect the cost of mortgage financing.

C. expresses operating expenses as a percent of effective gross income.

The cash-on-cash return

A. incorporates income tax considerations.

B. expresses before-tax cash flow as a percent of the required equity capital investment.

C. expresses before-tax cash flow as a percent of the property's acquisition price.

D. expresses net operating income as a percent of the required equity capital investment.

B. expresses before-tax cash flow as a percent of the required equity capital investment.

Ratio analysis

A. includes estimating the net present value of the investment opportunity.

B. is generally adequate to fully assess an investment's expected return.

C. requires cash flow estimates for the investment's entire expected holding period.

D. serves as an initial evaluation of the adequacy of an investment's risk or expected cash flows.

D. serves as an initial evaluation of the adequacy of an investment's risk or expected cash flows.

Assume a retail shopping center can be purchased for $6.0 million. The center's first year NOI is expected to be $489,500. A $5,000,000 loan has been requested. The loan carries a 4.0 percent fixed contract rate, amortized monthly over 25 years with a seven-year term.

What will be the property's (annual) debt coverage ratio in the first year of operations?

A. 1.546

B. 0.098

C. 18.547

D. 0.063

A. 1.546

Which of the following is not an operating expense associated with income-producing (commercial) property?

A. Debt service

B. Property taxes

C. Fire and casualty insurance

D. Janitorial services

A. Debt service

You are considering purchasing an office building for $2,500,000. You expect the potential gross income (PGI) in the first year to be $450,000; vacancy and collection losses to be 9 percent of PGI; and operating expenses and capital expenditures to be 38 percent and 4 percent, respectively, of effective gross income (EGI).

What is the implied first-year overall capitalization rate?

A. 9.5 percent

B. 10.0 percent

C. 10.5 percent

D. 11.0 percent

A. 9.5 percent

$450,000 x (1-.09) = $409,500 = EGI

$409,500 x .38 = $155,610

$409,500 x .04 = $16,380

$409,500 - $155,610 - $16,380 = $237,510

$237,510 / $2,500,000 = .095 or 9.5%

You are considering purchasing an office building for $2,500,000. You expect the potential gross income (PGI) in the first year to be $450,000; vacancy and collection losses to be 9 percent of PGI; and operating expenses and capital expenditures to be 38 percent and 4 percent, respectively, of effective gross income (EGI).

What is the effective gross income multiplier?

A. 5.56

B. 6.11

C. 16.38

D. 18.00

B. 6.11

$450,000 x (1-.09) = $409,500 = EGI

$2,500,000 / $409,500 = 6.11

Given the following information, what is the required equity down payment? Assume no acquisition costs.

Acquisition price: $800,000

Loan-to-value ratio: 75%

Total upfront financing costs: 3%

A. $118,000

B. $200,000

C. $218,000

D. $250,000

C. $218,000

$800,000 x (1-0.75) = $600,000

$600,000 x 0.03 = $18,000

$800,000 - $600,000 = $200,000

$200,000 + $18,000 = $218,000

A real estate investment is available at an initial cash outlay of $100,000 and is expected to yield cash flows of $33,438.10 per year for five years. The internal rate of return (IRR) is approximately

A. 2 percent.

B. 20 percent.

C. 23 percent.

D. 17 percent.

B. 20 percent.

The net present value of an acquisition is equal to

A. the present value of expected future cash flows, plus the initial cash outlay.

B. the present value of expected future cash flows, less the initial cash outlay.

C. the sum of expected future cash flows, less the initial cash outlay.

D. None of these choices are correct.

B. the present value of expected future cash flows, less the initial cash outlay.

The present value of unlevered future cash flows

A. in excess of zero means a project is expected to yield an unlevered rate of return less than the unlevered discount rate employed.

B. is the value now of all undiscounted unlevered cash flows that are expected to be received in the future.

C. will always equal zero when the discount rate is the internal rate of return.

D. will always equal a project's purchase price when the unlevered discount rate is equal to the unlevered internal rate of return.

D. will always equal a project's purchase price when the unlevered discount rate is equal to the unlevered internal rate of return.

The internal rate of return equation incorporates

A. future cash outflows and inflows, but not initial cash flows.

B. future cash outflows and inflows and the initial cash outflow, but not the initial cash inflow.

C. initial cash outflows and inflows and future cash inflows, but not future cash outflows.

D. initial cash outflows and inflows, and future cash outflows and inflows.

D. initial cash outflows and inflows, and future cash outflows and inflows.

The purchase price that will yield an investor the lowest acceptable rate of return is

A. the property's investment value to that investor.

B. the property's net present value.

C. the present value of anticipated future cash flows.

D. computed using the risk-free discount rate.

A. the property's investment value to that investor.

What term best describes the maximum price a buyer is willing to pay for a property?

A. Investment value

B. Highest and best use value

C. Competitive value

D. Market value

A. Investment value

A small income-producing property will require an initial equity investment of $600,000 and is expected to generate the following after-tax cash flows:

Year 1: $42,000

Year 2: $44,000

Year 3: $45,000

Year 4: $50,000

Year 5: $650,000.

Would an investor with a required after-tax rate of return of 15 percent be wise to invest at the current price?

A. No, the NPV is −$548,867.

B. No, the NPV is −$148,867.

C. Yes, the NPV is $51,133.

D. Yes, the NPV is $451,133.

B. No, the NPV is −$148,867.

As a general rule, using financial leverage

A. decreases risk to the equity investor.

B. increases risk to the equity investor.

C. has no impact on risk to the equity investor.

D. may increase or decrease risk to the equity investor, depending on the income tax treatment of the interest expense and the equity investor's marginal income tax bracket.

B. increases risk to the equity investor.

What is the levered IRR, assuming an industrial building can be purchased for $250,000 in equity and is expected to yield levered cash flows (BTCFs) of $18,000 for each of the next five years and generate a before-tax equity reversion (BTER) at the end of the fifth year of $280,000?

A. 0.09 percent

B. 4.57 percent

C. 9.20 percent

D. 10.37 percent

C. 9.20 percent

Which of the following is the least true?

A. Levered discount rates are greater than unlevered discount rates.

B. Levered, before-tax discount rates are greater than unlevered, before-tax discount rates.

C. After-tax discount rates are less than discount rates used to value before-tax cash flows.

D. After-tax discount rates are greater than discount rates used to value before-tax cash flows.

D. After-tax discount rates are greater than discount rates used to value before-tax cash flows.

The Institute of Real Estate Management (IREM) awards which of the following designations?

A. REM

B. CPM

C. MAI

D. RPA

B. CPM

A contractual relationship in which an individual must act in the best interests of a principal when dealing with a third party is termed

A. an agency relationship.

B. a lease arrangement.

C. a tenant-landlord relationship.

D. a joint venture contractual arrangement.

A. an agency relationship.

The requirement of a real estate property manager to act in the best interests of the landlord when dealing with a tenant is termed

A. an associate responsibility.

B. due process.

C. a fiduciary responsibility.

D. an implied responsibility of the employment contract.

C. a fiduciary responsibility.

Which of these is not typically a responsibility of a property manager?

A. Marketing and leasing

B. Tenant relations

C. Maintenance programs

D. Income tax analysis

D. Income tax analysis

Remodeling and rehabilitation

A. are preventive measures undertaken to prevent a loss in value.

B. are most likely categorized as operating expenses.

C. are expected to add value to the property if undertaken.

D. can usually be undertaken by the property manager without consulting the owner or asset manager.

C. are expected to add value to the property if undertaken.

Both the owner and the manager may be better off if property management compensation were based on a percentage of the property's

A. potential gross income.

B. effective gross income.

C. net operating income.

D. market value.

C. net operating income.

All of the following are necessary for a lease to be valid, except

A. consideration.

B. written leases, if longer than one year, in most states.

C. tenant's contact phone number, or address, in the event of an emergency.

D. statements to the effect that the tenant agrees to lease the property for a specified period and that the owner and the tenant agree to the terms of the rent.

C. tenant's contact phone number, or address, in the event of an emergency.

The asset manager is generally NOT responsible for

A. finding properties for the investor or principal.

B. arranging financing for properties.

C. making day-to-day maintenance decisions.

D. overseeing the due-diligence of the purchase for the investor or principal.

C. making day-to-day maintenance decisions.

Demolition of an existing property on an urban site will likely occur

A. after the building has been abandoned for a reasonable period of time.

B. when the highest and best use of the property is a taxpayer use, such as a parking lot or recreational park.

C. when the site value, assuming a new use, exceeds the value of the site under its existing use, plus the cost of demolition.

D. when the site value, under its existing use, exceeds the cost of demolition.

C. when the site value, assuming a new use, exceeds the value of the site under its existing use, plus the cost of demolition.

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.

B. credit tenants.

A lease in which the tenant pays a rent based, in part, on the sales of the tenant's business is known as a

A. percentage lease.

B. participation lease.

C. net lease.

D. gross lease.

A. percentage lease.

When the tenant pays a base rent plus some or all of the operating expenses of a property, the result is a

A. gross lease.

B. net lease.

C. percentage lease.

D. graduated lease.

B. net lease.

Existing leases

A. can be ignored by potential investors when estimating investment value.

B. must be considered more carefully when valuing a multitenant office building than valuing an apartment complex.

C. are more important when estimating market value than estimating investment value.

D. should be assumed to have remaining terms of 10 years when estimating investment value.

B. must be considered more carefully when valuing a multitenant office building than valuing an apartment complex.

With an expense stop clause

A. a property's operating expenses are paid by the tenant up to a specified per square foot level, above which the landlord is responsible for additional expenses.

B. the landlord is responsible for property operating expenses up to a specified level, above which increases in operating expenses become the obligation of the tenant based on the tenant's square footage.

C. landlords commit to a maximum tenant improvement allowance for new tenants.

D. tenants are reimbursed for electric bills in excess of a normal amount.

B. the landlord is responsible for property operating expenses up to a specified level, above which increases in operating expenses become the obligation of the tenant based on the tenant's square footage.

As a tenant, you wish to turn over all rights and responsibilities of your unexpired lease to a new tenant. If allowed to do so by the owner, you are

A. releasing your leasehold interest.

B. subleasing your leasehold interest.

C. assigning your leasehold interest.

D. relieving your leasehold interest.

C. assigning your leasehold interest.

All else equal, lease provisions that grant the tenant the right, but not the obligation, to do something generally result in

A. a lower base rent.

B. a higher base rent.

C. an indexed base rent.

D. nothing—a base rent is generally not affected by tenant options.

B. a higher base rent.

The tenant is usually responsible for paying property taxes and insurance in a

A. gross lease.

B. net lease.

C. net—net lease.

D. triple net lease.

C. net—net lease.

Which of the following statements regarding tenant improvements (TIs) is the least true in the context of commercial real estate leases?

A. TIs are usually stated as a dollar per square foot amount.

B. Tenants can generally negotiate higher TIs for existing space than for space in a newly developed project.

C. Tenants can generally negotiate higher TIs for space in a newly developed project than for space in an existing project.

D. The magnitude of the TIs is often a heavily negotiated lease term.

B. Tenants can generally negotiate higher TIs for existing space than for space in a newly developed project.

In shopping center leases, rents are typically quoted on the basis of what type of area occupied by the tenant?

A. Gross leasable area

B. Net leasable area

C. Rentable area

D. Usable area

A. Gross leasable area

The typical anchor tenant in a neighborhood shopping center is a

A. nationally known department store.

B. regional department store.

C. "big box" retailer such as Home Depot and Best Buy.

D. grocery store.

D. grocery store.