Questions and Answers of Real Estate Principles

a Investment type i Draw a cash flow diagram for an investment with an initial cash outflow of $$30$,000 followed by a three-year period with an inflow of $$5$,000 and a Return OF Capital in year
a Determine the capitalization rate for a property with a sales price of 600,000 and a Net Operating Income (NOI) of 42,000.b Determine the NOI for a property with a capitalization rate of 7%
a Calculate the NPV for the following project. An outflow of $$110$,000 in year 0 followed by an inflow of $$40$,000, $$45$,000, and $$50$,000 in one-year increments with a discount rate of
a Calculate the IRR for the following project. An outflow of $$8$,000 in year 0 followed by an inflow of $$3$,000, $$3$,500, and $$3$,500 in one-year increments.b Calculate the IRR for a
a Assuming $$120$,000 is invested today, for the next three years $$24$,000 is returned annually, and in the fourth year a lump sum of $$70$,000 is provided. What is the IRR of this series of
a Define risk for a project with a (1) best case scenario providing a 20% return and a 10% probability, (2) a most likely scenario consisting of a 12% IRR and a 70% probability of occurring, and (3)
What are holdbacks in construction lending? Why is the practice of holdbacks used?
An institutional investor is comparing management fees for two competing real estate investment funds. Both funds expect to begin operations and are accepting capital commitments. When the funds
The ABC Corporation is considering opening an office in a new market area that would allow it to increase its annual sales by $2.5 million. The cost of goods sold is estimated to be 40 percent of
What are title records? What is an abstract of title?
A closed-end, commingled opportunity fund is being created with an expected three-year life. It expects to acquire properties that it expects to turnaround and sell at the end of three years for a
A fund has an initial investment of $100 million from investors. The investors will receive an 8 percent preferred return. After the preferred return is met, remaining distributions will be split 80
Name the four general real estate investment styles and describe each. Identify three specialized styles within these general categories and give examples for each.
What is a deed? How is it different from the title?
What is meant by a title record? Why are these records so important?
What is a future estate? Give an example.
Mr. Investor has a property that he owns but would like to sell. He thinks that it is currently worth $100,000. He also thinks that in order to sell the property that he may need to provide seller
What is the sinking-fund factor? How and why is it used?
What types of expenses would property owners pay when operating and maintaining common areas? Give examples for office, retail, and warehouse properties.
This worksheet calculates the incremental return if the Apex property is renovated as illustrated in the chapter. Suppose that the NOI after renovation is $54,000 instead of $56,000. How does this
How does each of the following affect the IRR on the ATCF difference from owning versus leasing?a. The property can be leased for $140,000 instead of $160,000.b. A loan can be obtained at a 3.5
What are gross ups in determining tenant reimbursements for operating expenses? Why are they used?
What is meant by a target return? How does it relate to an investment benchmark?
When evaluating investment funds, what is meant by performance at the fund level and at the property level? What would generally cause a difference between the two? What is this difference called?
When thinking about the extent of discretion that fund managers have when making property acquisitions, under which fund structures would a manager tend to have the greatest discretion? Under which
When reporting property values to investors in funds, which fund types would generally require more frequent appraisals than others? Why?
What are the objectives of performing an attribution analysis? How could fund managers be evaluated by using an attribution analysis?
Why should risk be considered in an attribution analysis?
What is the purpose for a “clawback” in the calculation of a promote?
What procedure is used in your state to handle a pledge of collateral for a mortgage loan?
List five major economic base activities for your city of residence.
Find the historical population figures for your community for the 20th century. Create a chart by ten-year intervals. Determine the most rapid periods of growth, and try to discover what caused them.
Select a site in your city that is in a mixed use or non-residential area, and either is vacant or appears to be ready for change (e.g., structure partially used or vacant, or in need of
Select a property of interest to you, or to an industry contact, for which market research would be interesting. Examine the property, collect what information is available about it, and then write a
For your own state, determine whether: a. It is a judicial or non-judicial foreclosure state.b. The standard home loan is based on a deed of trust or a mortgage.c. There is a statutory right of
Solve for the unknown discount rate in each of the following: Present Value Years Discount Rate Future Value $2,970 $2,400 11.24% 11.61 10.95 10,800 1,853,820 5,316,180 3,600 10 390,000 382,610 15
Solve for the unknown number of years in each of the following: Present Value Discount Rate Future Value Years 9.63 $5,600 8,100 184,000 215,000 9% $12,840 43,410 17.61 19.02 10 17 3,645,180
Which of the following two ARMs is likely to be priced higher, that is, offered with a higher initial interest rate? ARM A has a margin of 3 percent and is tied to a three-year index with payments
A fully amortizing mortgage loan is made for $100,000 at 6 percent interest for 20 years.a. Calculate the monthly payment for a CPM loan.b. What will the total of payments be for the entire 20-year
How would the initial payment change if the payments increase by 5 percent each year instead of 7.5 percent?
What is meant by the incremental cost of borrowing additional funds?
A property is available for sale that could normally be financed with a fully amortizing $80,000 loan at a 10 percent rate with monthly payments over a 25-year term. Payments would be $726.96 per
Under what conditions might a home with an assumable loan sell for more than comparable homes with no assumable loans available?
Suppose the index goes to 18 percent in year 5. What is the effective cost of the unrestricted ARM?
How would the loan balance at the end of year 7 change if the payments increase by 5 percent each year instead of 7.5 percent?
Suppose another loan is available that is an 11 percent interest rate with 6 points. What is the effective cost of this loan compared to the original example on the template?
Regarding Problem 3, how much total interest and principal would be paid over the entire 30-year life of the mortgage in each case? Which payment pattern would have the greatest total amount of
In the absence of loan fees, does repaying a loan early ever affect the actual or true interest cost to the borrower?
An investment is expected to produce the following annual year-end cash flows:year 1: $5,000 year 4: $5,000year 2: $1,000 year 5: $6,000year 3: $0 year 6: $863.65The investment will cost $13,000
An investment producing cash flows in the amount of $1,200 per month is undertaken for a period of 28 months. The investor pays $24,000 for the investment and the contract stipulates that investment
An investor has the opportunity to make an investment that will provide an effective annual yield of 12 percent. She is considering two other investments of equal risk that will provide compound
An investment in a real estate venture will provide returns at the end of the next four years as follows: year 1, $5,500; year 2, $7,500; year 3, $9,500; and year 4, $12,500. An investor wants to
What are the interest factors (IFs) in Exhibit 3-9? How are they developed? How may financial calculators be used to calculate IFs in Exhibit 3-9?Exhibit 3.9Interest Factors for the Accumulation of
How are the interest factors (IFs) in Exhibit 3€“3 developed? How may financial calculators be used to calculate interest factors in Exhibit 3€“3?Exhibit 3.3Interest Factors for
In Problem 5, what if Mr. Nelligan was joined in the foreclosure suit but forgot to attend the sale and bid? Does Mr. Nelligan have any other way of getting Ms. Rosen to pay?Data from problem 5Mort
What would your answer be in Problem 5 if Mr. Nelligan’s mortgage was not recorded?Data from problem 5Mort owns a property. Jessica Rosen holds a first mortgage against it, and Alex Nelligan holds
Robust Properties is planning to go public by creating a REIT that will offer 1 million shares of stock. It is currently trying to develop a pro forma set of financial statements. Robust is faced
You have been presented with the following set of financial statements for National Property Trust, a REIT that is about to make an initial stock offering to the public. This REIT specializes in the
Explain how an investor in an equity REIT may receive a current dividend, part of which may be tax-deferred.
An issuer is trying to structure a floating rate tranche in a CMO offering. The tranche will be backed by mortgages with an 8 percent interest rate and a current balance of $2,000,000. Interest
An investor is considering the purchase of either an IO or PO strip from a CMO offering. The portion of the mortgage pool backing this tranche consists of $1,000,000 in mortgages with a remaining
Name the major types of credit enhancement used for commercial-backed mortgage securities.
What is meant by a derivative investment?
a. Find the value of the cash flows to the issuer and to individual investors based on a required rate of return of 7.5 percent.b. Find the value of the cash flows to the issuer and to individual
Two 25-year maturity mortgage-backed bonds are issued. The first bond has a par value of $10,000 and promises to pay a 10.5 percent annual coupon, while the second is a zero coupon bond that
What were the three principal activities of FNMA under its 1954 charter? What is its principal function now?
What is the secondary mortgage market? List three reasons why it is important.
A and B form a partnership where A, the limited partner, contributes $500,000 and B, the general partner, contributes no cash. The partnership secures a $2 million (10 percent interest only)
Venture Capital Limited has formed a private real estate syndication to acquire and operate the Tower Office Building. Venture will act as the general partner and will have 35 individual limited
ABC Fund has decided to enter into a joint venture with Newtown Development Inc. to develop and operate an office building that will require an initial investment of $100 million to cover all the
Lee Development Co. has found a site that it believes will support 75 homesites. The company also believes that the land can be purchased for $225,000 while direct development costs will run an
Treetop Associated Group (TAG) is seeking financing for acquisition and development of 147 homesites. The land will cost $1.5 million, and TAG estimates direct development costs to be an additional
Refer to Concept Box 17.1. A revised market study indicates the following: pricing for standard interior lots will probably be $103,000 each, premium interior lots $118,000, and corner lots $125,000;
As a financial advisor for the Spain Development Co., you have been given the construction and marketing studies for the proposed Timbercreek office project. Several potential sites have been
The CEO of Kuehner Development Co. has just come from a meeting with his marketing staff where he was given the latest market study of a proposed new shopping center, Parker Road Plaza. The study
Review Concept Box 16.2. The investor-developer would not be comfortable with a 7.8 percent return on cost because the “margin for error” is too risky. If construction costs are higher or rents
What is sensitivity analysis? How might it be used in real estate development?
How can development projects be differentiated from one another in the marketplace?
Refer to problem 1. ABC realizes that the benefits of leasing versus owning may be sensitive to many of the assumptions being made. Management wants to know how the return on the incremental cash
Refer to problem 1. Suppose that five years ago the corporation had decided to own rather than lease the real estate. Assume that it is now five years later and management is considering a
The ABC Corporation is considering opening an office in a new market area that would allow it to increase its annual sales by $2.5 million. Cost of goods sold is estimated to be 40 percent of sales,
How does the analysis of a sale-leaseback differ from the analysis of owning versus leasing?
This worksheet calculates the incremental return if the Apex property is renovated as illustrated in the chapter. Suppose the NOI after renovation is $42,000 instead of $45,000. How does this affect
Refer to the Worthington Distribution Center example in the chapter. Using ARGUS, suppose that the renewal probability for the market leasing assumption that applies to the computer distributing
Refer to the participation loan example in the chapter. Suppose the participation was reduced to 25 percent of the NOI in excess of $100,000 but increased to 75 percent of the gain in value.a. What
Ace Development Company is trying to structure a loan with the First National Bank. Ace would like to purchase a property for $2.5 million. The property is projected to produce a first year NOI of
An investor would like to purchase a new apartment property for $2 million. However, she faces the decision of whether to use 70 percent or 80 percent financing. The 70 percent loan can be obtained
What is the break-even mortgage interest rate (BEIR) in the context of financial leverage? Would you ever expect an investor to pay a break-even interest rate when financing a property? Why or why
Refer to the Monument Office Building example. Suppose market rents do not increase over time for lease renewals. How does this affect the unleveraged IRR?
Refer to the Monument Office example. Assume the capital gain tax rate is lowered to 5 percent for all capital gain (price increase and depreciation recapture). How does this affect the investor’s
You are still an employee of University Consultants, Ltd. The investor tells you she would also like to know how tax considerations affect your investment analysis. You determine that the building
You are an employee of University Consultants, Ltd., and have been given the following assignment. You are to present an investment analysis of a new small residential incomeproducing property for
An office building has three floors of rentable space with a single tenant on each floor. The first floor has 20,000 square feet of rentable space and is currently renting for $15 per square foot.
Do you think taxes affect the value of real estate versus other investments?
What is meant by equity?
Why should investors be concerned about market rents if they are purchasing a property subject to leases?
How do you think expense stops and CPI adjustments in leases affect the riskiness of the lease from the lessor’s point of view?
What factors would result in a property increasing in value over a holding period?
What factors affect a property’s projected NOI?
What are the primary benefits of investing in real estate income property?

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