Questions and Answers of Real Estate Principles

Ace Investment Company is considering the purchase of the Apartment Arms project. Next year’s NOI and cash flow is expected to be $2,000,000, and based on Ace’s economic forecast, market supply
Zenith Investment Company is considering the purchase of an office property. It has done an extensive market analysis and has estimated that based on current market supply/demand relationships,
Discuss the differences between using(1) a terminal cap rate and(2) an appreciation rate in property value when estimating revision values.
Is a cap rate the same as an IRR? Which is generally greater? Why?
When estimating the reversion value in the year of sale, why is the terminal cap rate applied to NOI for the year after the holding period?
What are some of the potential problems with using a "going in" capitalization rate that is obtained from previous property sales transactions to value a property being offered for sale today?
In general, what effect would a reduction in risk have on "going in" cap rates? What would this effect have if it occurred at the same time as an unexpected increase in demand? What would be the
When may a "terminal" cap rate be lower than a "going in" cap rate? When may it be higher?
What is meant by depreciation for the cost approach?
Under what conditions should financing be explicitly considered when estimating the value of a property?
Why do you think appraisers usually use three different approaches when estimating value?
What is meant by a unit of comparison? Why is it important?
What is the relationship between a discount rate and a capitalization rate?
If investors buy properties based on expected future benefits, what is the rationale for appraising a property without making any income or resale price projections?
What is a capitalization rate? What are the different ways of arriving at an overall rate to use for an appraisal?
What is the economic rationale for the sales comparison approach? What information is necessary to use this approach? What does it mean for a property to be comparable?
What is the economic rationale for the cost approach? Under what conditions would the cost approach tend to give the best value estimate?
Refer to the effective rent example on page 275 in the book that is replicated in the Ch9 Eff.Rent tab in the Excel workbook provided on the Web site.a. Suppose the CPI is expected to increase by 4
You have been asked to develop a pro forma statement of cash flow for West Office Plaza. The information given to you is listed below.Property Information:WEST OFFICE PLAZARentable Area
You have been asked to develop a pro forma statement of cash flow for Betts Distribution Center, an Internet-based order fulfillment/distribution/office/warehouse property. In addition to recoverable
You have been asked to develop a pro forma statement of cash flow for the coming (base) year for Summer Place Mall. The information given to you is listed below.Property Information:SUMMER PLACE
You have been asked to develop a pro forma statement of cash flow for the coming year for Autumn Seasons, a 200-unit suburban garden apartment community. This community has a mix of 40 studio, 80
A retail lease for 10,000 square feet of rentable space is being negotiated for a five-year term. Option A calls for a base rent of $25 per square foot for the coming year with step-ups of $1 per
What is meant by "loss to lease"?
What is an estoppel? Why is it used?
What are(a) Pass through expenses,(b) Recoverable expenses,(c) Common area expenses?Give examples of each.
You are trying to estimate the value of a property that you are interested in buying. The subject property is located at 322 Rock Creek Road in a new suburb of a large metropolitan area. The property
You are considering an option to purchase or rent a single residential property. You can rent it for $2,000 per month and the owner would be responsible for maintenance, property insurance, and
What are the capital gains rules as applied to residential property owners?
An appraiser is looking for comparable sales and finds a property that recently sold for $200,000. She finds that the buyer was able to assume the seller’s fully amortizing mortgage which had
A borrower is making a choice between a mortgage with monthly payments or biweekly payments. The loan will be $200,000 at 6 percent interest for 20 years.a. How would you analyze these
Is the incremental cost of borrowing additional funds affected significantly by early repayment of the loan?
Why is the income approach to value often difficult to use on a single family residential appraisal?
What are the differences between the cost and sales comparison approaches to appraising property?
You are considering the purchase of a property today for $300,000. You plan to finance it with an 80 percent loan. The appreciation rate on the property value is expected to be 4 percent annually for
An investor is considering the acquisition of a “distressed property’’ which is on Northlake Bank’s REO list. The property is available for $200,000 and the investor estimates that he can
List four important drivers of housing demand and price appreciation.
What are public goods? How may they be reflected in house prices?
You have an opportunity to acquire a property from First Capital Bank. The bank recently obtained the property from a borrower who defaulted on his loan. First Capital is offering the property for
When considering an investment in “distressed” properties, what are the most important areas of research that should be considered?
Determine the after-tax IRR for owning versus renting in each of the five years with the following changes in the original assumptions in the spreadsheet:a. The homeowner has a 15 percent marginal
What is the legislative intent of federal truth-in-lending disclosures, and what specific disclosures are required under the act?
What are CAM charges?
When would the cost of credit life insurance be included in the finance charge of an APR calculations for the truth-in-lending disclosures?
You are a new loan officer with Alpha Mortgage, and the manager of the loan department has just presented a problem to you. He is unable to complete the APR calculation on an adjustable rate mortgage
A loan with the following terms is being made:Fixed rate, constant monthly payment. Closing date February 9th.9% interest rate. Prepaid interest due at closing.$70,000 mortgage loan amount.$1,500
What assumptions about future composite rate of interest on an adjustable rate mortgage is made when determining the APR for federal truth-in-lending disclosures?
On August 20, Mr. and Mrs. Cleaver decided to buy a property from Mr. and Mrs. Ward for $105,000. On August 30, Mr. and Mrs. Cleaver obtained a loan commitment from OKAY National Bank for an $84,000
List the closing cost items, which require RESPA disclosure. What items may be excluded from disclosures under the act? What form can these disclosures take?
What types of fees and conditions are prohibited under RESPA?
For what items may a lender require escrow accounts from a borrower?
How does the use of leases shift the risk from lessor to the lessee?
A building owner is evaluating the following alternatives for leasing space in an office building for the next five years:Net lease with steps. Rent will be $15 per square foot the first year and
As CFO for Everything.Com, you are shopping for 5,000 square feet of usable office space for 25 of your employees in Center City, USA. A leasing broker shows you space in Apex Atrium, a 10-story
What is the difference between base rents and effective rents?
An owner of the Atrium Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corp. for 20,000 rentable square feet of space. ACME would like a base rent of $20 per
What is meant by usable vs. rentable space?
CAM charges for retail leases in a shopping mall must be calculated. The retail mall consists of a total area of 2.8 million square feet, of which 800,000 square feet has been leased to anchor
Small City currently has 1 million square feet of office space, of which 900,000 square feet is occupied by 3,000 employees who are mainly involved in professional services such as finance,
What are the similarities and differences between an overall rate and an equity dividend rate?
What is the significance of a debt coverage ratio?
What is meant by tax shelter?
How is the gain from the sale of real estate taxed?
What is meant by an effective tax rate? What does it measure?
What is the significance of the passive activity loss limitation (PALL) rules for real estate investors?
What is financial leverage? Why is a one-year measure of return on investment inadequate in determining whether positive or negative financial leverage exists?
What is positive and negative financial leverage? How are returns or losses magnified as the degree of leverage increases? How does leverage on a before-tax basis differ from leverage on an after-tax
A developer wants to finance a project costing $1.5 million with a 70 percent, 25-year loan at an interest rate of 8 percent. The project’s NOI is expected to be $120,000 during year 1 and the NOI,
In what way does leverage increase the riskiness of a loan?
An institutional lender is willing to make a loan for $1 million on an office building at a 10 percent interest (accrual) rate with payments calculated using an 8 percent pay rate and a 30-year loan
Do you think renovation is more or less risky than a new investment?
The Green S & L originated a pool containing 75 ten-year fixed interest rate mortgages with an average balance of $100,000 each. All mortgages in the pool carry a coupon of 12 percent. (For
Name two ways that FNMA currently finances its secondary mortgage operations.
When did GNMA come into existence? What was its original function? What is its main function now?
Why was the formation of FHLMC so important?
What is a mortgage-related security? What are the similarities and differences between mortgage securities and corporate bonds?
Name the principal types of mortgage-related securities. What are the difference between them?
There are several ways that mortgages can be sold in the secondary market. Choose two and compare and contrast their length of distribution channel, relative ease of transaction, and efficiency as it
What is the function of the optional delivery commitment?
What is a mortgage swap certificate?
Name five important characteristics of mortgage pools. Tell why each is important.
In general, would a falling rate of market interest cause the price of an MPT security to increase or decrease? Would the increase or decrease be greater if the security was issued at a discount?
What is a mortgage pay-through bond (MPTB)? How does it resemble a mortgage-backed bond (MBB)? How does it differ?
The MZ Mortgage Company is issuing a CMO with three tranches. The A tranche will consist of $40.5 million with a coupon of 8.25 percent. The B tranche will be issued with a coupon of 9.0 percent and
The Provincial Insurance Company has the choice of investing $100,000 in either a mortgage bond with annual payments based on a 10-year amortization schedule with a maturity of five years at 10
Are the overcollateralization requirements the same for mortgage pay-through bonds as for the mortgage-backed bonds?
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?

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