FINAL EXAM - Principles of REAL. Review/Study Questions
Chapter: 10-11; 14-22
Terms in this set (110)
Private mortgage insurance (PMI) is usually required on _____ loans with loan- to-value ratios greater than _____ percent.
d. Home, 80 percent.
The dominant loan type originated and kept by most depository institutions is the:
a. Fixed-payment, fully amortizing mortgage. (Note, while this answer has traditionally been correct, the sharp increase in adjustable rate loans since about 2004, could alter the correct answer to b. Adjustable rate mortgage.)
Which of the following mortgage types has the most default risk, assuming the initial loan-to-value ratio, contract interest rate, and all other loan terms are identical?
a. Interest only loans.
A mortgage that is intended to enable older households to "liquify" the equity in their home is the:
d. Reverse annuity mortgage.
A jumbo loan is:
b. A conventional loan that is too large to be purchased by Fannie Mae or Freddie Mac.
The maximum loan-to-value ratio for an FHA loan over $50,000 is approximately:
b. 98 percent.
The maximum loan-to-value ratio on a VA guaranteed loan is:
d. 100 percent.
Conforming conventional loans are loans that are:
c. Are eligible for purchase by Fannie Mae and Freddie Mac.
Home equity loans typically:
d. Have tax-deductible interest charges.
The best method of determining whether to refinance is to use:
a. Net benefit analysis.
Probably the greatest contribution of FHA to home mortgage lending was to:
a. Establish the use of the level-payment home mortgage.
Mortgage banking companies:
a. Collect monthly payments and forward them to the mortgage investor.
In recent years, the mortgage banking industry has experienced:
d. Rapid consolidation.
Currently, which type of financial institution in the primary mortgage market provides the most funds for the residential (owner-occupied) housing market?
d. Commercial banks
For all except very high loan-to-value conventional home loans the standard payment ratios for underwriting are:
a. 28 percent and 36 percent
The numerator of the standard housing expense (front-end) ratio in home loan underwriting includes:
c. Monthly principal, interest, property taxes, and hazard insurance.
The most profitable activity of residential mortgage bankers is typically
b. Loan servicing.
Potential sub-prime borrowers include persons who:
d. All of these.
Savings banks are now virtually indistinguishable from:
b. Savings and loan associations.
The reduced importance of certain institutions in the primary mortgage market has been largely offset by an expanded role for others. Which has diminished and which has expanded?
d. Savings and loan associations; mortgage bankers.
Warehousing refers to
b. Short-term loans made by commercial banks to mortgage bankers.
How much will a $50 deposit made today be worth in 20 years if the compound rate of interest is 10 percent?
How much would you pay for the right to receive $80 at the end of 10 years if you can earn 15 percent interest?
How much would you pay to receive $50 in one year and $60 in the second year if you can earn 15 percent interest?
What amount invested at the end of each year at 10 percent annually will grow to $10,000 at the end of five years?
How much would you pay for the right to receive nothing a year for the next 10 years and $300 a year for the following 10 years if you can earn 15 percent interest?
What is the present value of $500 received at the end of each of the next three years and $1,000 received at the end of the fourth year, assuming a required rate of return of 15 percent?
If a landowner purchased a vacant lot six years ago for $25,000, assuming no income or holding costs during the interim period, what price would the landowner need to receive today to yield a 10 percent annual return?
What is the present value of the following series of cash flows discounted at 12 percent: $40,000 now; $50,000 at the end of the first year; $0 at the end of year the second year; $60,000 at the end of the third year; and $70,000 at the end of the fourth year?
Assume an income-producing property is priced at $5,000 and has the following income stream (year 1, $1,000; year 2, -$2,000; year 3, $3,000; and year 4, $3,000). Would an investor with a required rate of return of 15 percent be wise to invest at the current price?
b. No, because the project has a net present value of -$1,954.91.
The most typical adjustment interval on an adjustable rate mortgage (ARM) once the interest begins to change is:
b. One year.
A characteristic of a partially amortized loan is:
b. A balloon payment is required at the end of the loan term.
If a mortgage is to mature (i.e. become due) at a certain future time without any reduction in principal, this is called:
d. Interest-only mortgage.
The dominant loan type originated by most financial institutions is the:
a. Fixed-payment, fully amortized mortgage
Which of the following statements is true about 15-year and 30-year fixed- payment mortgages?
d. Assuming that they can afford the payments on both mortgages, borrowers should choose a 30-year mortgage over an otherwise identical 15-year loan if their discount rate (opportunity cost) exceeds the mortgage rate.
Adjustable rate mortgages (ARMs) commonly have all of the following except:
e. Inflation index.
The annual percentage rate (APR) was created in:
a. The Truth-in-Lending Act of 1968
On a level-payment loan with 12 years (144 payments) remaining, at an interest rate of 9% percent, and with a payment of $1,000, the balance is:
On the following loan, what is the best estimate of the effective borrowing cost if the loan is prepaid in six years?
Interest rate: 7 percent
Term: 180 months
Up-front costs: 7 percent of loan amount
d. 8.7 percent.
Lender's yield differs from effective borrowing costs (EBC) because:
c. EBC accounts for additional up-front expenses that lender's yield does not.
Due-on-sales clauses are included in commercial mortgages primarily to protect lenders from:
b. Default risk.
Consider a 30-year, 7 percent, fixed rate, fully amortizing mortgage with a yield maintenance provision. Relative to this mortgage, a 10-year balloon mortgage with the same interest rate and yield maintenance provisions will primarily reduce the lender's:
a. Interest rate risk.
Lockout provisions are primarily intended to reduce the lender's:
c. Reinvestment risk
The tax-benefits associated with installment sales are:
b. Captured exclusively by the seller.
Which of the following statements is most accurate?
b. Joint ventures decrease the amount of equity capital the developer/borrower must invest in the project.
Which of the following financing structures provides for 100 percent financing?
d. Complete (land and building) sale-leaseback
Using financial leverage on a real estate investment can be for the purpose of all of the following except:
d. Reduction of financial risk for the leveraged investment.
Which of these ratios is an indicator of the financial risk for an income property?
d. Both a and b, but not c
If the property's NOI is expected to be $22,560 operating expenses $12,250, and the debt service $19,987, the debt coverage ratio (DCR) is approximately equal to:
With a mezzanine loan
c. the borrower's promise to pay is secured by the equity interest in the borrower's limited partnership or limited liability company.
Double taxation is most likely to occur if the commercial properties are held in the form of a(n):
c. C Corporation
With regard to double taxation, distributions, and the treatment of the losses, general partnerships are most like:
c. Limited Partnerships
Special Allocations of income or loss are available if the form of ownership is a(n):
c. Limited Partnerships
Real Estate Syndicates traditionally have been legally organized most frequently as:
c. Limited Partnerships
A real estate investment trust generally:
d. None of the above
Which of the following forms of ownership involve both limited and unlimited liability?
a. limited partnerships
Which statement is false concerning the limited partnership of ownership?
c. The limited partners cannot enjoy tax benefits but the general partners can.
Which of these lenders is most likely to provide a construction loan?
c. Commercial Bank
Which of these loans is a life insurance most likely to invest in?
c. Large office building loan (nonconstruction)
Which of the financial firms is most likely to invest in a large, long-term mortgage loan on a shopping center?
c. Life insurance company
a. are useful as a preliminary analysis tool to weed out obviously unacceptable investment opportunities.
The overall capitalization rate:
a. is the reciprocal of the net income multiplier.
The operating expense ratio:
c. expresses operating expenses as a percent of effective gross income.
The equity dividend rate:
b. expresses before-tax cash flow as a percent of the required equity cash outlay.
d. serves as an initial evaluation of the adequacy of an investment's cash flow.
Assume a retail center can be purchased for $5.5 million. The center's NOI is expected to be $489,500. A $4,000,000 loan has been requested. The loan carries a 9.25 percent fixed contract rate, amortized monthly over 25 years with a 7-year term. What will be the property's (annual) debt coverage ratio?
Which of the following is not an operating expense associated with income producing (commercial) property?
a. debt service
What is the implied first year overall capitalization rate?
a. 9.5 percent
What is the effective gross income multiplier?
Given the following information, what is the required equity down payment?
• Acquisition price: $800,000
• Loan-to-value ratio: 75%
• Up-front financing cost: 3%
A real estate investment is available at an initial cash outlay of $10,000, and is expected to yield cash flows of $3,343.81 per year for five years. The internal rate of return (IRR) is approximately:
b. 20 percent.
The net present value of an acquisition is equal to:
b. the present value of expected future cash flows, less the initial cash outlay.
b. is the value now of all net benefits that are expected to be received in the future.
The internal rate of return equation incorporates:
d. initial cash outflow and inflow, and future cash outflow and inflow.
The purchase price that will yield an investor the lowest acceptable rate of return:
a. is 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
An income-producing property is priced at $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; and 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?
b. No, the NPV is -$148,867.
As a general rule, using financial leverage:
b. increases risk to the equity investor.
What is the IRR, assuming an industrial building can be purchased for $250,000 and is expected to yield cash flows of $18,000 for each of the next five years and be sold at the end of the fifth year for $280,000?
c. 9.20 percent
Given the following information, what is the required equity investment due at closing?
• Acquisition price: $800,000
• Loan-to-value ratio: 75%
• Financing cost: 3%
Taxable income from the rental of actively managed depreciable real estate is classified as:
b. Passive income.
Under current federal income tax law, what is the shortest cost recovery period available to investors purchasing residential rental property?
e. None of the above.
If an investor is a "dealer" with respect to certain real estate, then that real estate is classified (by the IRS) as being held:
b. For sale to others
When a property is sold for less than its remaining book value, its depreciation (wear and tear) was:
For tax purposes, a substantial real property improvement made after the initial purchase is:
a. Treated like a separate building.
What percent of the rental income from residential property must be derived from the leasing of units occupied by tenants as housing?
c. 80 percent
In 2007, you purchase a small office building for $450,000, which you financed with a $337,500, 25-year, fixed-rate mortgage. Up-front financing costs total $6,750. How much of this expense could be written off against ordinary income in 2007?
If the investor is in the 33% income tax bracket, how much will a tax credit of $2,000 save the investor in taxes?
Which of the following best describes the taxation of gain and losses from the sale of Section 1231 assets?
d. Net gains are taxed as capital gains; net losses are taxed as ordinary income.
10. Which of the following statements is false?
d. Net passive losses can be used to offset dividend income from a REIT stock.
The Institute of Real Estate Management (IRM) awards which of the following designations?
A contractual relationship where an individual must act in the best interests of a principal when dealing with a third party is termed:
a. An agency relationship.
The requirement of a real estate manager to act in the best interests of the landlord when dealing with a tenant is termed:
c. A fiduciary responsibility
Which of these is not typically a responsibility of a property manager?
d. Income tax analysis.
Remodeling and rehabilitation:
c. Are expected to add value to the property.
Both the owner and the manager may be better off if management's compensation were based on a percentage of the property's:
c. Net operating income.
The following are necessary for a lease to be valid, except:
c. Tenant's contact phone number, or address, in the event of an emergency.
The asset manager is NOT responsible for:
c. Making maintenance decisions.
Demolition of an existing property on an urban site will likely occur:
c. When the site value, assuming a new use, exceeds the value of the site under its existing use, plus the cost of demolition.
For non-real estate corporations, which of the following is not a potential advantage of a real estate sale-leaseback?
c. The firm benefits from property appreciation that occurs after the sale- leaseback.
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.
When the tenant pays a base rent plus some or all of the operating expenses of a property, the result is a:
b. Net Lease.
b. Must be considered more carefully when valuing a multi-tenant office building than valuing an apartment complex.
With an expense stop clause:
b. The landlord is responsible for operating expenses up to a specified level, above which increases in operating expenses become the obligations of the tenant.
As a tenant, you wish to turn over all rights and responsibilities of your unexpired lease term to a new tenant. By doing so, you are:
c. Assigning your leasehold interest.
Lease provisions that grant the tenant the right, but not the obligation, to do something generally result in:
b. A higher base rent.
The tenant is responsible for paying property taxes and insurance in a:
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?
Actually, both b. and d. are equally untrue.
In shopping center leases, rents are typically quoted on the basis of what type of area occupied by the tenant?
a. Gross leasable area.
The typical anchor tenant in a neighborhood shopping center is a:
d. Grocery store.