The following information relates to Questions 1328

First Life Insurance Company, Ltd., a life insurance company located in the United Kingdom, maintains a stock and bond portfolio and also invests in all four quadrants of the real estate market; private equity, public equity, private debt, and public debt. Each of the four real estate quadrants has a manager assigned to it. First Life intends to increase its allocation to real estate. The Chief Investment Officer (CIO) has scheduled a meeting with the four real estate managers to discuss the allocation to real estate and to each real estate quadrant. Leslie Green, who manages the private equity quadrant, believes her quadrant offers the greatest potential and has

identified three investment properties to consider for acquisition. Selected information for the three properties is presented in Exhibit 1.

To prepare for the upcoming meeting, Green has asked her research analyst, Ian Cook, for a valuation of each of these properties under the income, cost and sales comparison approaches using the information provided in Exhibit 1, and the following two assumptions:

1. Assumption 1 The holding period for each property is expected to be five years.

2. Assumption 2

   Property B is expected to have the same net operating income for the holding period due to existing leases, and a one-time 20% increase in year 6 due to lease rollovers. No further growth is assumed thereafter.

In reviewing Exhibit 1, Green notes the disproportionate estimated obsolescence charges for Property C relative to the other properties and asks Cook to verify the reasonableness of these estimates. Green also reminds Cook that they will need to conduct proper due diligence. In that regard, Green indicates that she is concerned whether a covered parking lot that was added to Property A encroaches (is partially located) on adjoining properties. Green would like for Cook to identify an expert and present documentation to address her concerns regarding the parking lot.

In addition to discussing the new allocation, the CIO informs Green that she wants to discuss the appropriate real estate index for the private equity real estate quadrant at the upcoming meeting. The CIO believes that the current index may result in over-allocating resources to the private equity real estate quadrant.

13. The most effective justification that Green could present for directing the increased allocation to her quadrant would be that, relative to the other quadrants, her quadrant of real estate investments:

A. provides greater liquidity. B. requires less professional management.

C. enablesgreaterdecision-makingcontrol.

14. Relative to the expected correlation between First Lifes portfolio of public REIT holdings and its stock and bond portfolio, the expected correlation between First Lifes private equity real estate portfolio and its stock and bond portfolio is most likely to be:

A. lower. B. higher.

C. the same.

15. Which of the properties in Exhibit 1 exposes the owner to the greatest risk related to operating expenses?

A. PropertyA

B. PropertyB

C. PropertyC

16. Which property in Exhibit 1 is most likely to be affected by import and export activity? A. PropertyA B. PropertyB C. PropertyC

16. Which property in Exhibit 1 would most likely require the greatest amount of active management?

    A. PropertyA B. PropertyB C. PropertyC

17. Which property in Exhibit 1 is most likely to have a percentage lease? A. PropertyA

    B. PropertyB

    C. PropertyC

18. The disproportionate charges for Property C noted by Green are least likely to explicitly factor into the estimate of property value using the:

    A. cost approach. B. incomeapproach. C. sales comparison approach.

16. Based upon Exhibit 1, which of the following statements regarding Property A is most accurate?

    A. The going-in capitalization rate is 13.5%.

B. It appears the riskiest of the three properties.

C. The net operating income in the first year is 298,000.

21. Based upon Exhibit 1, the value of Property C using the direct capitalization method is

closest to: A. 3,778,900. B. 4,786,700. C. 6,527,300.

22. Based upon Exhibit 1 and Assumptions 1 and 2, the value of Property B using the discounted cash flow method, assuming a five-year holding period, is closest to:

    A. 4,708,700. B. 5,035,600. C. 5,050,900.

22. Which method under the income approach is least likely to provide a realistic valuation for Property B?

A. B. C.

24. Based

A.

B.

C.

Layer method Direct capitalization method Discounted cash flow method

upon Exhibit 1, the value of Property A using the cost approach is closest to: 5,281,000. 6,531,000. 9,385,000.

25. Based closest to:

upon Exhibit 1, the value of Property B using the sales comparison approach is

A. 4,781,000. B. 4,858,000. C. 6,110,000.

24. Based

A.

B.

C.

Layer method Direct capitalization method Discounted cash flow method

upon Exhibit 1, the value of Property A using the cost approach is closest to: 5,281,000. 6,531,000. 9,385,000.

25. Based closest to:

upon Exhibit 1, the value of Property B using the sales comparison approach is

A. 4,781,000. B. 4,858,000. C. 6,110,000.

26. Which due diligence item would be most useful in addressing Greens concerns regarding Property A?

    1. Propertysurvey

    2. Engineeringinspection

    3. Environmental inspection

27. The real estate index currently being used by First Life to evaluate private equity real

estate A. B. C. 28. Based A. B. C.

investments is most likely: an appraisal-based index. a transaction-based index. the NCREIF property index.

upon Exhibit 1, the property expected to be most highly leveraged is: PropertyA PropertyB PropertyC