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real estate principles
Real Estate Principles A Value Approach 5th edition David C Ling, Wayne Archer - Solutions
State, in no more than one sentence, the condition for favorable financial leverage in the calculation of NPV.
State, in no more than one sentence, the condition for favorable financial leverage in the calculation of the IRR.
You are considering the acquisition of a small office building. The purchase price is $775,000. Seventy-five percent of the purchase price can be borrowed with a 30-year, 7.5 percent mortgage. Payments will be made annually. Up-front financing costs will total three percent of the loan amount. The
You are considering the purchase of an apartment complex. The following assumptions are made:• The purchase price is $1,000,000.• Potential gross income (PGI) for the first year of operations is projected to be $171,000.• PGI is expected to increase at 4 percent per year.• No vacancies are
The expected before-tax IRR on a potential real estate investment is 14 percent. The expected after-tax IRR is 10.5 percent. What is the effective tax rate on this investment?
Why do investors generally care whether the IRS classifies cash expenditures as operating expenses rather than capital expenditures?
How are the discount points associated with financing an income property handled for tax purposes?
Over the entire five-year holding period, how much were your taxes from rental operations reduced by the annual depreciation deductions? Ignore the increased taxes due on sale.
What are the four classifications of real estate holdings for tax purposes? Which classifications of property can be depreciated for tax purposes?
You are considering the purchase of a small apartment complex.a. Calculate the mortgage payment, the interest deduction, the depreciation deduction, and the amortized financing costs for the first year of operations.b. What will be your net equity investment at “time zero”?c. Estimate the
Compute the after-tax cash flow from the sale of the following nonresidential property.a. Compute the annual depreciation expense.b. Compute the adjusted basis at the time of sale (after two years).c. Compute the tax liability from sale.d. Compute the after-tax cash flow (equity reversion)
A real estate investor is considering the purchase of a small office building. The following assumptions are made:Answer the following questions for the first year of operations:a. What is the equity (cash) down payment required at “time zero”?b. What is the annual tax depreciation deduction?c.
An investor purchased a property with an equity investment of $100,000 and an $800,000 mortgage. She has held the property for five years, and the mortgage now has a balance of $750,000. The market value of her property is estimated to be $950,000. What is her present equity investment?
What should be included as costs to be matched by value added after rehabilitation?
What factors can change after rehabilitation of a property to produce a higher “after” value than “before” value?
What does the property management agreement accomplish?
Define deferred maintenance and list some examples.
How is the financial compensation for property managers usually determined? What “agency” problem does this seem to create?
Why is the tenant mix critically important to the performance of shopping center investments?
In the real estate asset management/investment advisory business, why has performance-based management replaced, or at least partially supplemented, the “traditional” scheme for compensating some asset managers?
In the context of asset management agreements in the private commercial real estate industry, what is a benchmark index? What is the most typical benchmark index?
With respect to complying with applicable landlord-tenant laws, is it easier to manage an apartment complex or an office building? Explain.
Using the following information, compute net operating income ( NOI ) for the first year of operations. Use an “above-line” treatment of capital expenditures.• Number of apartments: 10• Rent per month per apartment: $900.00• Expected vacancy and collection loss: 10 percent• Annual
What is the basic shortcoming of most ratios and rules of thumb used in commercial real estate investment decision making?
What distinguishes an operating expense from a capital expenditure?
You are considering purchasing an office building for $2,500,000. You expect the potential gross income (PGI) in the first year of operations to be $450,000; vacancy and collection losses to be 9 percent of PGI; and operating expenses and capital expenditures to be 42 percent of effective gross
Why do Class B properties generally sell at higher going-in cap rates than Class A properties?
Of the more than $3.2 trillion in outstanding commercial real estate debt, what percent is traded in public markets? What percent is traded in private markets? What institutions or entities are the long-term holders of private commercial real estate debt?
What are the major restrictions that a REIT must meet on an ongoing basis in order to avoid taxation at the entity level?
Explain how affordable housing loans differ from standard home loans.
If a closing occurs on September 1 of a 365-day year, how will the year’s property tax of $900 be prorated? (Note: the day of closing “belongs” to the buyer.)
How would the hazard insurance premium be prorated?Rosie Malone sold her house to D.M. Band. The contract was signed June 1, 2017, and closing was set for June 25, 2017. Rosie had prepaid her three-year hazard insurance policy in the amount of $1,825.00 on April 1, 2016, and D.M. agreed to assume
How would the water and sewer charges be prorated?Rosie Malone sold her house to D.M. Band. The contract was signed June 1, 2017, and closing was set for June 25, 2017. Rosie had prepaid her three-year hazard insurance policy in the amount of $1,825.00 on April 1, 2016, and D.M. agreed to assume it
How will the mortgage assumption be entered?Rosie Malone sold her house to D.M. Band. The contract was signed June 1, 2017, and closing was set for June 25, 2017. Rosie had prepaid her three-year hazard insurance policy in the amount of $1,825.00 on April 1, 2016, and D.M. agreed to assume it at
How will the monthly mortgage payment be prorated?Rosie Malone sold her house to D.M. Band. The contract was signed June 1, 2017, and closing was set for June 25, 2017. Rosie had prepaid her three-year hazard insurance policy in the amount of $1,825.00 on April 1, 2016, and D.M. agreed to assume it
The owner of a parcel of land containing approximately 25 acres contracted a debilitating disease and decided to sell his real estate as quickly as possible. Within a week, he received an offer of $320,250. The owner accepted this offer by signing a standard form contract that had been obtained and
A couple decided to sell their house in Washington, D.C., without the aid of a real estate broker. Their asking price was $425,000, which they believed was about $15,000 less than the price they would need to list the property with a broker. They realized they would probably have to accept an offer
Dr. Bob Jackson owns a parcel of land that a local farmer has offered to rent from Dr. Bob for the next 10 years. The farmer has offered to pay $20,000 today or an annuity of $3,200 at the end of each of the next 10 years. Which payment method should Dr. Jackson accept if his required rate of
Calculate the present value of the income stream given below assuming a discount rate of 8 percent. What happens to present value if the discount rate increases to 20
What monthly deposit is required to accumulate $10,000 in eight years if the deposits earn an annual rate of 8 percent, compounded monthly?
Assume the total cost of a college education will be $310,000 when your infant child enters college in 18 years. How much you invest at the end of each month in order to accumulate the required $310,000 at the end of 18 years if your monthly investments earn an annual interest rate of 5 percent,
You are trying to accumulate a $40,000 down payment to purchase a home. You can afford to save $1,000 per quarter. If these quarterly investments earn an annual rate of 7 percent, how many quarters will it take to reach your goal?
You have signed a new lease today to rent office space for five years. The lease payments are fixed at $4,500 per month for the first two years, but rise to $5,500 per month in years 3-5. What is the present value of this lease obligation if the appropriate discount rate is 8 percent?
Suppose you are going to receive $10,000 per year for five years. The appropriate interest/discount rate is 11 percent. a. What is the present value of the payments if they are in the form of an ordinary annuity? a1. What is the present value if the payments are an annuity due?b. Suppose
Calculate the original loan size of a fixed-payment mortgage if the monthly payment is $1,581.59, the annual interest is 5.0%, and the original loan term is 15 years.
For a loan of $100,000, at 4 percent annual interest for 30 years, find the balance at the end of 4 years and 15 years assuming monhly payments.
On an adjustable rate mortgage, do borrowers always prefer smaller (tighter) rate caps that limit the amount the contract interest rate can increase in any given year or over the life of the loan?
Consider a $75,000 mortgage loan with an annual interest rate of 4%. The loan term is 7 years, but monthly payments will be based on a 30-year amortization schedule. What is the monthly payment? What will be the required balloon payment at the end of the loan term?
Give some examples of up-front financing costs associated with residential mortgages. What rule can one apply to determine if a settlement (closing) cost should be included in the calculation of the effective borrowing costs?
A homeowner is attempting to decide between a 15-year mortgage loan at 3.5 percent and a 30-year loan at 4.00 percent. Assume the up-front costs of the two alternatives are equal. What would you advise? What would you advise if the borrower also has a large amount of credit card debt outstanding at
Suppose a one-year ARM loan has a margin of 2.75, an initial index of 3.00 percent, a teaser rate for the first year of 4.00 percent, and a cap of 1.00 percent. If the index rate is 3.00 percent at both the beginning and the end of the first year, what will be the interest rate on the loan in
Assume the following:Loan Amount:.............$100,000Interest rate:.................10 percent annuallyTerm:.............................15 years, monthly paymentsa. What is the monthly payment?b. What will be the loan balance at the end of nine years?c. What is the effective borrowing cost on the
For a 30-year loan with a face value of 150,000, 5 percent annual interest, and monthly payments find the monthly payment and remaining mortgage balance at the end of year 5 and 20, and 30.
Consider a 20-year loan with a monthly payment of $1,897.95 and an annual interest rate of 4.5 percent. What was the original loan size?
You are considering buying a $200,000 house with a 5 percent down payment, a 30-year mortgage, a fixed annual rate of 4.5 percent, and monthly payments. What is the monthly payment? What is the monthly payment times 12? What is the annual payment assuming payments are made annually instead of
Consider a $200,000 mortgage loan with an annual interest rate of 7 percent. The loan term is 8 years but the monthly payment is based on a 25-year amortization period. Find the monthly payment and the balloon payment at the end of the loan term.
Assume a $175,000 mortgage loan and 10-year term. The lender is charging an annual interest rate of 6 percent and 4 discount points at origination. What is the monthly payment assuming that it based on an amortization period of 30 years? What will be the required balloon payment at the end of the
Briefly explain a commingled real estate fund. Who are the investors in these funds and why do these investors use commingled funds for their purchases?
Assume that you have purchased a home and can qualify for a $200,000 loan. You have narrowed your mortgage search to the following two options: Mortgage ALoan term: 30 yearsAnnual interest rate: 6 percentMonthly paymentsUp-front financing costs: $5,000Discount points: 3Mortgage BLoan term:
Consider a 25-year loan with an annual interest rate of 7 percent and monthly payments of $1,201.53. The discount points charged by the lender at origination are 3 percent and the cost of borrower title insurance and mortgage insurance are, respectively, 0.5 percent and 2.0 percent of the loan
Consider a one-year, $150,000 ARM with a 30-year amortization period. The index rate is currently 3.75 percent and you estimate that it will increase by 25bp (0.25%) each year for the following 2 years. The fixed margin is 225bp (2.25%), but the lender is offering a teaser rate of 5 percent for the
Consider a $150,000 loan with an annual interest rate of 6.5 percent and a 30-year term. Discount points are equal to 2 percent. All other up-front financing costs to be paid by the borrower total $3,000. Compute the monthly payment and the loan balance at the end of months 1-6. What is the
Consider the stand-alone locations favored by Walgreens for locating their drugstores. In most cases, Walgreens does not own these properties. Instead, they lease the properties on a long-term basis from institutional owners. What does Walgreens gain by leasing instead of owning? What do they lose?
Consider the following table of annual mortgage rates and yields on 10-year Treasury securities.a. What was the average annual spread on mortgage rates relative to the 10-year Treasury securities over the 1990-2005 period?b. What was the correlation between annual mortgage rates and Treasury yields
List and briefly describe the typical items included in a commercial mortgage loan submission package.
What is the difference in the present value of these two loan alternatives? Assume the appropriate discount rate is 6 percent.
You are considering the purchase of an industrial warehouse. a. Calculate the overall rate of return (or “cap rate”)b. Calculate the debt coverage ratio.c. What is the largest loan that you can obtain (holding the others terms constant) if the lender requires a debt service coverage ratio
Distinguish among land acquisitions loans, land development loans, and construction loans. How would you rank these three with respect to lender risk?
Discuss the potential advantages of a miniperm loan from the prospective of the developer/investor, relative to the separate financing of each stage of the development.
For what debt in a general partnership is each of the general partners liable?
What are the potential advantages of investing in commercial real estate through intermediaries instead of direct investment? What are the potential disadvantages?
Approximately 88 percent of private commercial real estate equity (on a value- weighted basis) is owned by “noninstitutional” investors. Who are these investors?
Discuss the role life insurance companies play in financing commercial real estate.
If you purchase a parcel of land today for $25,000 and you expect it to appreciate 10 percent per year in value, how much will your land be worth 10 years from now assuming annual compounding?
If you deposit $1 at the end of each of the next ten years and these deposits earn interest at 10 percent compounded annually, what will the series of deposits be worth at the end of the 10th year?
If you deposit $50 per month in a bank account at 10 percent annual interest (compounded monthly), how much will you have in your account at the end of the 12th year?
If your parents purchased an endowment policy of $10,000 for you and the policy will mature in 12 years, how much is it worth today, discounted at 15 percent annually?
A family trust will convey property to you in 15 years. If the property is expected to be worth $50,000 when you receive it, what is the present value of your interest, discounted at 10 percent annually?
If someone pays you $1 a year for 20 years, what is the present value of the series of future payments discounted at 10 percent annually?
You are at retirement age and one of your benefit options is to accept an annual annuity of $75,000 for 15 years. The first payment would be received one year from today. What lump sum settlement, if paid today, would have the same present value as the $75,000 annual annuity? Assume a 10 percent
List three “clienteles” for subprime home mortgage loans.
You have just signed a contract to purchase your dream house. The price is $120,000 and you have applied for a $100,000, 30-year, 5.5 percent loan. Annual property taxes are expected to be $2,000. Hazard insurance will cost $400 per year. Your car payment is $400, with 36 months left. Your monthly
Contrast automated underwriting with the traditional “Three Cs” approach
Ted Richardson owns a large industrial building in your city that he wishes to sell. As a real estate broker, you would be delighted to obtain the listing on this property. You have worked with Richardson on two other transactions in which he was the buyer; therefore, you approach Richardson to
You are a real estate salesperson working for Good Earth, Realtors, Inc. You receive 50 percent of all commissions received by the firm (net of MLS fees) for which you were either the listing agent or the selling agent. The firm receives 40 percent of commissions for sales of properties it lists
If you owned your own real estate brokerage firm, how could you establish a niche in the market for your firm? In other words, how could you set your firm apart from other brokerage firms, and how could you create a unique image for your firm?
Explain why there occurred numerous experimental or innovative approaches to residential real estate brokerage in the United States in the years following 2000.
A friend of yours, Cindy Malvern, is moving to your town to begin a new job. Cindy has decided to buy a condominium, and because you are taking a real estate course, she asks you how to proceed.You first “Google” condominiums for your city and notice that a number of existing condominiums are
You decide to open a real estate office in your community, but you know you would face stiff competition from established firms. You believe that one method of drawing attention to your firm and obtaining clients that would otherwise go to other brokers is to advertise that you will sell any house
Describe the mechanics of warehouse financing in mortgage banking..
What went wrong with mortgage brokerage? Is it being fixed?
Explain what “pipeline risk” is in mortgage banking and why it is such a dominating risk to mortgage banking.
What is the primary purpose of the risk-based capital requirements that Congress enacted as part of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)?
Eight years ago you borrowed $200,000 to finance the purchase of a $240,000 house. The interest rate on the old mortgage is 6%. Payment terms are being made monthly to amortize the loan over 30 years. You have found another lender who will refinance the current outstanding loan balance at 4% with
Assume an elderly couple owns a $140,000 home that is free and clear of mortgage debt. A reverse annuity mortgage (RAM) lender has agreed to a $100,000 RAM. The loan term is 12 years, the contract is 9.25%, and payments will be made at the end of each month.a. What is the monthly payment on this
Explain the maturity imbalance problem faced by savings and loan associations that hold fixed-payment mortgages as assets.
Discuss the role and importance of private mortgage insurance in the residential mortgage market.
Distinguish between conforming and nonconforming residential mortgage loans and explain the importance of the difference.
Explain why a home equity mortgage loan can be a better source of funds for household needs than other types of consumer debt.
On an adjustable rate mortgage, do borrowers always prefer smaller (i.e. tighter) rate caps that limit the amount the contract interest rate can increase in any given year or over the life if the loan? Explain why or why not.
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