Questions and Answers of Real Estate Principles

Name two different ways that MPTBs can be overcollateralized.
What is a CMO? Explain why a CMO has been called as much of a marketing innovation as a financial innovation.
What is the return on the residual class for prepayment rates of 15 percent, 20 percent, 25 percent, and 30 percent?
Assume that $15,000,000 in floaters and $5,000,000 in inverse floaters are issued. How does this change the returns for the inverse floater when LIBOR is 2 percent, 4 percent, and 6 percent?
Name the four major classes of mortgage-related securities. As an issuer, explain the reasons for choosing one type over another.
What is the return on the IO and PO at prepayment rates of 25 percent and 30 percent?
What is the major difference between a CMO and the other types of mortgage-related securities?
Suppose there is default at maturity and the property sells for 90 percent of the loan balance. What are the returns to the subordinate tranche and residual?
Why are CMOs overcollateralized?
What is the purpose of the accrual tranche? Could a CMO exist without a Z class? What would be the difference between the CMO with and without the accrual class?
Which tranches in a CMO issue are least subject to price variances related to changes in market interest rates? Why?
What is the primary distinction between mortgage-related securities backed by residential mortgages and those backed by commercial mortgages?
What is a “floater”/”inverse-floater” tranche in a CMO offering?
What is the role of the “scaler” in structuring an (F) and (IF) structure?
Why would anyone want to purchase an (F) or (IF) derivative type of investment?
What are (IO) and (PO) strips? Which tends to be more volatile in price? Why?
In what ways is a CMBS structure different from a CMO backed by residential mortgages? Why is default risk in a CMBS offering given more attention?
How do CDOs differ from CMBS?
How can derivative security be used to hedge portfolio risk?
What are the risks of global investment?
Why should an investor consider investing globally?
Results presented in the chapter are based on historical data. Of what use are these results to a portfolio manager who may be making an investment decision today? Elaborate.
Results reported in the chapter showed that by including either REITs or the NCREIF Index in a portfolio containing S&P 500 securities, corporate bonds, and T bills, diversification benefits
What is the difference between covariance and correlation? Why are these concepts so important in portfolio analysis?
Mean returns for portfolios are calculated by taking the weighted average of the mean returns for each investment in the portfolio. Why won’t this approach work to calculate the standard deviation
When NCREIF returns and REIT returns are compared, NCREIF returns exhibit a much lower pattern of variation. Why might this be the case?
What statistical concept do many portfolio managers use to represent risk when considering investment performance?
What is the difference between arithmetic and geometric mean returns?
Suppose the correlation between NCREIF and the S&P 500 is -20 percent. How does this change the standard deviation of the portfolio when 50 percent of the portfolio is allocated to each
What are the distinguishing characteristics between REIT data and the NCREIF Property Index?
As an investment advisor for MREAF (Momentum Real Estate Advisory Fund), you are about to make a presentation to the portfolio manager of the ET&T pension fund. You would like to show what would
What are some of the difficulties of obtaining data to measure real estate investment performance?
What is a mortgage REIT?
What are some important lease provisions of which investors should be aware when analyzing the financial statements of REITs?
What is the difference between earnings per share (EPS), funds from operation (FFO), and dividends per share?
Atlantis REIT expects an income of $8.00 per share. This includes a deduction of $2.00 per share for depreciation. Atlantis did not have any gains from the sale of real estate. Its properties are
List and characterize equity REITs based on their investment objectives.
What are the three principal types of REITs?
What are the general requirements regarding income, investments, and dividends with which a REIT must comply to maintain its tax-exempt status?
What is the main difference between organizing a real estate venture a corporation versus a general partnership? How does a limited partnership have some of the characteristics of both?
How are general partners usually compensated in a syndication? What major concerns should investors consider when making an investment with a syndication
Differentiate between public and private syndications? What is an accredited investor? Why is the distinction used?
What concerns should an investor in a real estate syndication have regarding general partners?
Why do you think the Tax Reform Act of 1986 affected the desirability of investing in real estate syndications?
What are the different ways that the general partner is compensated?
How does the risk associated with investment in a partnership differ for the general partner versus a limited partner?
What is the significance of capital accounts? What causes the balance in a capital account to change each year?
What causes the after-tax IRR (ATIRRe) for the general partner to differ from that of the limited partner?
What are special allocations?
What is the main difference between the way a partnership is taxed versus the way a corporation is taxed?
Suppose the split between the limited and general partner is 99 percent for the limited partner and 1 percent for the general partner for equity contributions, income, and allocation of gain. How
Why is the Internal Revenue Service concerned with how partnership agreements in real estate are structured?
How can the general partner-syndicator structure the partnership to offer incentives to limited partners?
What is the advantage of the limited partnership ownership form for real estate syndications?
What is the difference between an IRR preference and an IRR lookback?
What are the unique risks of land development projects from the developer’s and lender’s point of view?
Refer to problem 3, Change the assumptions in the file to solve problem 3. Then answer the following questions.a. Determine the release price based on a repayment schedule calling for the loan to be
In land development projects, why do lenders insist on loan repayment rates in excess of sales revenue? What is a release price?
What are some of the physical considerations that a developer should be concerned with when purchasing land? How should such considerations be taken into account when determining the price that
What is an option contract? How is it used in land acquisition? What should developers be concerned with when using such options? What contingencies may be included in a land option?
How might land development activities be specialized? Why is this activity different from project development discussed in the preceding chapter?
Why is the practice of “holdbacks” used? Who is involved in this practice? How does it affect construction lending?
It is sometimes said that land represents “residual” value. This statement reflects the fact that improvement costs do not vary materially from one location to another whereas rents vary
What do we mean by overage in a retail lease agreement? How might it be calculated?
What is the major concern construction lenders express about the income approach to estimating value? Why do they prefer to use the cost approach when possible? In the latter case, if the developer
What is the difference between the assignment of a take-out commitment to the construction lender and a triparty agreement? If neither device is used in project financing, what is the relationship
Why don’t permanent lenders usually provide construction loans to developers? Do construction lenders ever provide permanent loans to developers?
A presale agreement is said to be equivalent to a take-out commitment. What will the construction lender be concerned about if the developer plans to use such an agreement in lieu of a take-out?
Third-party lenders sometimes provide gap financing for project developments. Why is this lending used? How does it work?
What is a mini-perm or bullet loan? When and why is this loan used?
What is a standby commitment? When and why is it used?
What contingencies are commonly found in permanent or take-out loan commitments? Why are they used? What happens if they are not met by the developer?
Describe the process of financing the construction and operation of a typical real estate development. Indicate the order in which lenders who fund project development financing are sought and why
a. What is the yield to the lender and the investor’s after-tax IRR if 90 percent of the loan must be drawn during the first four months and 10 percent during the last eight months?b. Repeat (a)
What are some development strategies that many developers follow? Why do they follow such strategies?
What are the sources of risk associated with project development?
What factors would tend to affect the value of a lease?
Why should corporations have their real estate appraised on a regular basis?
What factors might cause the highest and best use of real estate to change during the course of typical lease term?
Why might refinancing be considered an alternative to a sale-leaseback?
Why has real estate often been a key factor in corporate restructuring?
Why might it be argued that corporations do not have a comparative advantage when investing in real estate as a means of diversification from the core business?
Why is the cost of financing with a sale-leaseback essentially the same as the return from continuing to own?
Why is the value of corporate real estate often considered “hidden” from shareholders?
Why might the decision to own rather than lease real estate have an unfavorable effect on the corporation’s financial statements?
What would cause the rate of return for an investor that purchases real estate and leases it to the corporation to differ from the rate of return earned by the corporation on the incremental
How does each of the following affect the IRR on the ATCF difference from owning versus leasing?a. The property can be leased for $175,000 instead of $200,000.b. A loan can be obtained at an 8
Why might the riskiness of cash flow from the residual value of the real estate differ from the riskiness of cash flow from the corporation’s core business? What would cause these cash flows to be
Why might the cost of a mortgage loan be greater than the cost of using unsecured corporate debt to finance corporate real estate?
What factors would tend to make leasing more desirable than owning?
What are the main reasons that corporations may choose to own real estate?
Why would an investor consider doing an exchange or an installment sale?
In general, what kinds of tax incentives are available for rehabilitation of real estate income property?
What is meant by the “incremental cost of refinancing?”
What are the benefits and costs of renovation?
Are tax considerations important in renovation decisions?
How important are taxes in the decision to sell a property?
How can tax law changes create incentives for investors to sell their properties to other investors?
Why would refinancing be an alternative to sale of the property?
An investor is considering selling a property that has an adjusted basis of $1.5 million for $2 million. The property has a loan balance of $1.75 million. She is exploring different disposition

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