I need to know which formulas are used and explanations to figure out the answers

Real Estate Finance and Investments Chapters Test Bank

CHAPTER 9 Income-Producing Properties: Leases, Rents, and the Market for Space TRUE/FALSE 1. Analysis of effective rents tends to be superior to analysis of total rents over the life of a lease. (T) 2. The existing stock of space cannot be adjusted in the short run, but can be increased or decreased in the long run. (T) 3. To attract anchor tenants, property owners tend to charge them lower rents. They make-up for the lower rents by charging the anchor tenant higher CAM charges. (F) 4. Overage rent is rent that exceeds expenses. (F) 5. The term \"percentage rent\" refers to rent paid as a percent of space leased. (F) 6. A gross lease is where tenants pay all expenses. (F) 7. The term \"usable area\" is typically synonymous with \"leaseable area.\" (F) 8. The use of a CPI index in a lease contract shifts risk to the tenant. (T) 9. Expense stops protect the lessee from unexpected changes in market rents. (T) 10. A gross lease is riskier for the lessor than a net lease. (F) 11. Net operating income is the income after deduction of mortgage payments. (F) 12. If a lease has free rent earlier in its term, its default risk might be considered slightly higher. (F) 13. CPI adjustments are used to adjust rents by all or part of the increase in the Consumer Price Index. (T) MULTIPLE CHOICE -1- 14. Consider the figure above. Point D represents: (B) (A) (B) (C) (D) (E) Equilibrium occupancy Market rent Vacancy Shortage Market failure 15. Consider the figure above. The difference between the existing stock of space and Point D represents: (C) (A) (B) (C) (D) (E) Equilibrium occupancy Market rent Vacancy Shortage Market failure 16. Consider the figure above. If the demand for units increases, what would happen in equilibrium, holding everything else constant? (D) (A) (B) (C) (D) (E) Market rent would decrease; equilibrium occupancy would decrease Market rent would decrease; equilibrium occupancy would increase Market rent would increase; equilibrium occupancy would decrease Market rent would increase; equilibrium occupancy would increase Impossible to determine from the information provided -2- 17. For which of the following reasons would a business prefer to own space rather than lease it? (A) (A) The business demands specialized or unique facilities (B) Owning allows the business to develop skills in operating, maintaining, and repair real estate and the associated facilities (C) Owning reduces operating flexibility (D) The capital commitments with owning are lower than the capital commitments associated with leasing (E) All of the above are reasons a business would prefer to own space rather than lease it 18. A building owner charges net rent of $20 in the first year, $21 in the second year, and $22 in the third year. Using a 10 percent discount rate, what is the effective rent over the three years? (B) (A) (B) (C) (D) (E) $20.00 $20.94 $21.00 $21.73 $22.00 19. A building owner charges net rent of $20 in the first year, $21 in the second year, and $22 in the third year, but is providing six months of free rent in the first year as a concession. Using a 10 percent discount rate, what is the effective rent over the three years? (A) (A) $17.28 (B) $20.00 (C) $20.94 (D) $21.00 (E) $21.73 (F) Which of the following is NOT a type of commercial property? (C) 20. (A) (B) (C) (D) 21. The difference between the existing stock of space and the equilibrium occupancy is known as: (D) (A) (B) (C) (D) 22. Single-tenant office building Regional shopping center Warehouse Office/showroom Supply Demand Equilibrium Vacancy The dollar amount by which total rent exceeds base rent under a percentage lease for retail is referred to as: (A) (A) (B) Overage rent Excess rent -3- (C) (D) Percentage rent Marginal rent The supply of space is: (C) (A) (B) (C) Inelastic in both the short run and the long run Elastic in both the short run and the long run Relatively inelastic in the short run, and highly elastic in the long run (A) (D) Relatively elastic in the short run, and highly inelastic in the long run 23. Expenses for a 1,000 square foot office space are $6.00 per square foot. The lease specifies an expense stop of $5.40. What is the total expense paid by the landlord? (A) (A) (B) (C) (D) $5,400 $6,000 $600 $0 24. A 1,500 square foot office space is leased at $12.00 square foot. The space is vacant one month out of the year. Office expenses are $6.50 per square foot and an expense stop is set at $6.00 per square foot. What is the annual net operating income? (A) (A) (B) (C) (D) 25. A clause which requires a tenant in retail space to achieve a certain level of sales or the lease will be terminated is referred to as a: (B) (A) (B) (C) (D) 26. $7,500 $6,750 $15,750 $8,250 Change clause Termination clause Option clause Santa clause A clause in a non-anchor tenant's lease requiring the presence of an anchor tenant is referred to as a: (B) (A) (B) (C) (D) Non-compete clause Co-tenancy clause Joint tenancy clause Anchor clause 27. Income after deducting vacancy that is available to pay expenses is referred to as: (B) (A) Potential gross income (B) Effective gross income (C) Net operating income -4- (D) Before-tax cash flow 28. A 1,000 square foot office space is leased at $15.00 per square foot during the first year with $2.00 step-up provisions each of the following years. The lease is gross with an expense stop set at $6.65 per square foot, and yearly expenses per square foot are as follows: $6.00, $6.65, and $7.05. The lease provides for two months of free rent at the end of the lease term. If the lease term is three years and the discount rate is 10%, what is the effective rent per square foot? (B) (A) $9.38 (B) $9.50 (C) $10.22 (D) $10.46 CHAPTER 6 Mortgages: Additional Concepts, Analysis, and Applications 29. A house is for sale for $250,000. You have a choice of two 20-year mortgage loans with monthly payments: (1) if you make a down payment of $25,000, you can obtain a loan with a 6% rate of interest or (2) if you make a down payment of $50,000, you can obtain a loan with a 5% rate of interest. What is the effective annual rate of interest on the additional $25,000 borrowed on the first loan? (C) (A) (B) (C) (D) (E) 1.00% 6.00% 12.95% 18.67% 20.10% 30. A borrower has secured a 30 year, $150,000 loan at 7% with monthly payments. Fifteen years later, the borrower has the opportunity to refinance with a fifteen year mortgage at 6%. However, the up front fees, which will be paid in cash, are $2,500. What is the return on investment if the borrower expects to remain in the home for the next fifteen years? (E) (A) (B) (C) (D) (E) 6.00% 7.00% 13.00% 22.62% 28.89% 31. A borrower has secured a 30 year, $150,000 loan at 7% with monthly payments. Fifteen years later, an investor wants to purchase the loan from the lender. If market interest rates are 5%, what would the investor be willing to pay for the loan? (C) (A) (B) (C) (D) $75,000 $111,028 $118,478 $168,646 -5- 32. A borrower is purchasing a property for $180,000 and can choose between two possible loan alternatives. The first is a 90% loan for 25 years at 9% interest and 1 point and the second is a 95% loan for 25 years at 9.25% interest and 1 point. Assuming the loan will be held to maturity, what is the incremental cost of borrowing the extra money? (A) (A) 13.66% (B) 13.50% (C) 14.34% (D) 12.01% 33. Use the information in problem 1, except assume that the loan will be repaid in 5 years. What is the incremental cost of borrowing the extra money? (A) (A) (B) (C) (D) 13.95% 13.67% 14.42% 12.39% 34. When purchasing a $210,000 house, a borrower is comparing two loan alternatives. The first loan is a 90% loan at 10.5% for 25 years. The second loan is an 85% loan for 9.75% over 15 years. Both have monthly payments and the property is expected to be held over the life of the loan. What is the incremental cost of borrowing the extra money? (D) (A) (B) (C) (D) 20.25% 16.17% 11.36% 12.42% 35. A borrower made a mortgage loan 7 years ago for $160,000 at 10.25% interest for 30 years. The loan balance is now $151,806.62 and rates for this amount are currently 9.0% for 23 years. Origination fees and closing costs are $4,500 and closing costs are not financed by the lender. What is the effective cost of refinancing? (D) (A) (B) (C) (D) 9.00% 10.85% 15.32% 9.39% 36. Mr. Tramp made a mortgage 5 years ago for $85,000 at 8.25% interest and a 15 year term. Rates have now risen to 10% for an equivalent loan. Mr. Tramp's lender is willing to discount the loan by $2,000 if he will prepay the loan. What rate of return would Mr. Tramp receive by prepaying the loan? (B) (A) (B) (C) (D) 10.24% 8.95% 14.32% 9.14% -6- 37. A loan was made 10 years ago for $140,000 at 10.5% for a 30 year term. Rates are currently 9.25%. What is the market value of the loan? (C) (A) (B) (C) (D) $128,271 $147,600 $139,828 $151,395 38. Bud is offering a house for sale for $180,000 with an assumable loan which was made 5 years ago for $140,000 at 8.75% over 30 years. Kelsey is interested in buying the property and can make a $20,000 down payment. A second mortgage can be obtained for the balance at 12.5% for 25 years. What is the effective cost of the combined loans, if Kelsey would like to compare this financing alternative to obtaining a first mortgage for the full amount? (B) (A) (B) (C) (D) 10.63% 9.39% 9.04% 11.27% 39. A house is sold with an assumable $156,000 below-market loan at 8.5% for a remaining term of 15 years. Current rates are 9.75% for 15 year mortgages. If the house sold for $240,000, what is the cash-equivalent value of the house. (B) (A) (B) (C) (D) $250,834.82 $229,165.18 $260,660.40 $219,339.60 40. Ms. Madison has an existing loan with payments of $782.34. The interest rate on the loan is 10.5% and the remaining loan term is 10 years. The current balance of the loan is $57,978.99. The home is now worth $120,000 and Ms. Madison would like to borrow an additional $30,000 through a wraparound loan which would increase the debt to 487,978.99. Terms of the wraparound loan are 12.25% interest with monthly payments for 10 years. What is the incremental cost of borrowing the extra $30,000 through a wraparound loan? (A) (A) (B) (C) (D) 15.47% 11.38% 12.96% 13.41% 41. Mr. Fisher has built several houses and is offering buyers mortgage rates of 10% with 15 year term. Current rates are 10.75%. Fourth National Bank will provide the loans, if Mr. Fisher pays an equivalent amount up front to buy down the interest rate. If a house is sold for $290,000 with a 90% loan, how much would Mr. Fisher have to pay to buy down the loan? (D) (A) $1,957.50 (B) $11,989.34 (C) $11,250.25 -7- (D) $10,790.41 CHAPTER 5 Adjustable and Floating Rate Mortgage Loans MULTIPLE CHOICE 42. A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments. The first two years of the loan have a \"teaser\" rate of 4%, after that, the rate can reset with a 2% annual rate cap. On the reset date, the composite rate is 5%. What would the Year 3 monthly payment be? (B) (A) (B) (C) (D) (E) $955 $1,067 $1,071 $1,186 Because of the rate cap, the payment would not change. 43. A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments. The first two years of the loan have a \"teaser\" rate of 4%, after that, the rate can reset with a 5% annual payment cap. On the reset date, the composite rate is 6%. What would the Year 3 monthly payment be? (C) (A) (B) (C) (D) (E) $955 $1,067 $1,003 $1,186 Because of the payment cap, the payment would not change. 44. Assume that the loan in the previous question allowed for negative amortization. What would be the outstanding balance on the loan at the end of Year 3? (B) (A) (B) (C) (D) $190,074 $192,337 $192,812 $192,926 45. Under which scenario is negative amortization likely to occur? (C) (A) (B) (C) (D) Payment Cap None None 7.5% 7.5% Interest Rates Increasing Decreasing Increasing Decreasing 46. Which of the following does the term \"anchor tenant\" usually refer to? (C) (A) Someone who leases space -8- (B) The largest tenant in an office building (C) A department store in a mall (D) The tenant who pays the highest rent in a mall 47. Which of the following describes the function of an expense stop in a lease? (C) (A) (B) (C) (D) Expenses are stopped from increasing Expenses above the stop are paid by the owner Expenses above the stop are paid by the tenant Expenses below the stop are paid for by the tenant 48. Which of the following is TRUE for a net lease? (B) (A) (B) (C) (D) All expenses are paid by the owner All expenses are paid by the tenant All expenses are paid by the lender All expenses are paid by the investor 49. Which of the following tends to lower effective rents? (C) (A) (B) (C) (D) Percentage rent Step up provisions Concessions CPI adjustment 50. Which of the following does the term \"in-line tenants\" refer to? (A) (A) (B) (C) (D) Smaller stores in a mall that are not anchor tenants Tenants whose sales are in line with estimates Tenants who pay their rents on a timely basis All stores located inside the mall, including anchors 51. Which of the following is FALSE regarding cap rates? (B) (A) (B) (C) (D) Excess supply tends to drive cap rates up Rising interest rates generally tends to lower cap rates Excess demand and falling interest rates results in lower cap rates Excess demand leads to lower cap rates 52. Which of the following leads to rent premiums? (D) (A) (B) (C) (D) Apartments on periphery of site, higher floors with no elevators Second or third levels in multi-level malls Middle floors in office building Apartments on higher floors with elevators -9