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MGMT 170 - Real Estate Finance and Investments

FINAL EXAM PRACTICE QUESTIONS

Winter 2024

1)        A 200,000 square foot Best Buy anchored shopping center in suburban Chicago, Illinois that was purchased in January 2020 for $50 million was producing an annual NOI of

$3,000,000 at the time of acquisition. Purchase money financing was obtained from

CIBC Bank at a 60% LTV ratio and a 5.75% annual interest rate payable monthly and fully amortized over 30 years. What was the acquisition cap rate?

(A) 15.0%

(B) 10.0%

(C) 6.0%

(D) 4.0%

2)        A property investor wanted to acquire a 100,000 square foot industrial building in

Portland, Oregon for $60 per square foot. JP Morgan Chase committed to fund a 30- year fixed rate purchase money mortgage at an annual interest rate of 5.25% with a  maximum LTV of 70%. What is the minimum amount of equity needed to close the acquisition?

(A) $6,000,000

(B) $4,200,000

(C) $3,000,000

(D) $1,800,000

3)        A 36-unit apartment building in McLean, Virginia is expected to appreciate in value at a rate of 10% per year. If the owner borrows at an LTV of 80% interest-only and the

property’s NOI exactly covers the monthly mortgage payments, what would be the expected appreciation rate on the invested equity for the first year?

(A) 10%

(B) 20%

(C) 50%

(D) 75%

4)        A 26-unit apartment building in North Hollywood was purchased for $10,000,000 at a

cap rate of 3.75% with a 75% LTV interest-only 7-year mortgage loan at a 3.5% annual  interest rate. If the owner paid the monthly mortgage payments on time, and if after five  years the property appreciated by 40%, what would be the amount of the owner’s equity in the property at that time?

(A) $2,500,000

(B) $4,000,000

(C) $6,500,000

(D) $10,000,000

5)        A borrower who was in default on a mortgage loan entered into discussions with his lender to negotiate a workout of the loan agreement. Which one of the following

concessions would likely be most acceptable to the lender?

(A) Permanently reducing the interest rate on the loan

(B) Reducing the outstanding principal balance of the loan

(C) Allowing the borrower to not make any monthly payments for a year

(D) Temporarily reducing the interest rate while adding the reduction to the loan balance

16)      You are in escrow to buy a four-bedroom, three-bathroom single family house in Irvine,  California for $1,200,000. You have a choice of two 30-year fixed-rate fully amortizing mortgage loans with monthly payments: (A) if you make a 10% down payment, you can obtain a loan with a 6% annual interest rate, or (B) if you make a 20% down payment,    you can obtain a loan with a 5% annual interest rate. What is the incremental annual

borrowing cost on the additional amount borrowed if you take the higher LTV loan?

(A) 5.0%

(B) 6.0%

(C) 12.9%

(D) 14.0%

17)      A shopping center owner refinanced one of her retail buildings in San Jose, California

with a 10-year interest-only adjustable rate mortgage loan from Citibank for $18,000,000. The loan index was the SOFR rate, and the margin was 2.25%. The loan had a “teaser”  rate of 1.5% for the first loan year, then the loan rate reset annually with 2% annual and   6% lifetime interest rate increase caps. At the time the loan was made, the SOFR rate

was 1.0%. What would be the balloon payment due on the loan if the monthly payments were all made on time and the loan was paid off on the maturity date?

(A) $0

(B) $14,782,941

(C) $17,035,285

(D) $18,000,000

18)      A shopping center owner refinanced one of her retail buildings in San Jose, California

with a 10-year interest-only adjustable rate mortgage loan from Citibank for $18,000,000. The loan index was the SOFR rate, and the margin was 2.25%. The loan had a “teaser”  rate of 1.5% for the first loan year, then the loan rate reset annually with 2% annual and   6% lifetime interest rate increase caps. At the time the loan was made, the SOFR rate

was 1.0%. What would be the monthly payment for the first year of the loan?

(A) $22,500

(B) $33,750

(C) $48,760

(D) $62,122

19)      A shopping center owner refinanced one of her retail buildings in San Jose, California

with a 10-year interest-only adjustable rate mortgage loan from Citibank for $18,000,000. The loan index was the SOFR rate, and the margin was 2.25%. The loan had a “teaser”  rate of 1.5% for the first loan year, then the loan rate reset annually with 2% annual and   6% lifetime interest rate increase caps. On the first reset date, the SOFR rate was 3.0%.  What would be the monthly payment for the second loan year?

(A) $22,500

(B) $45,000

(C) $52,500

(D) $78,750

20)      REITs must comply with a number of federal tax law requirements or they will be taxed

at the entity level. Legal entities that do not have to pay tax at the entity level are called:

(A) Corporations

(B) Pass-through entities

(C) Special purpose vehicles

(D) Joint ventures

25)      A particularly desirable office building development site near the Santa Monica Pier is a 60’ by 200’ rectangular lot. If the local zoning codes require that the building’s footprint

be set back ten feet from each side of the property line, and if the FAR for that site is 3.0 per square foot of the building’s footprint, what is the maximum building square footage that can be built?

(A) 7,200

(B) 12,000

(C) 21,600

(D) 36,000

26)      A 100,000 square foot office building in Oakland, California is fully leased to a single

tenant at $30.00 PSF per year. The building’s expenses total $7.50 PSF per year and an expense stop in all the leases is set at $6.00 PSF per year. What is the total annual

expense amount paid by the landlord?

(A) $750,000

(B) $600,000

(C) $150,000

(D) $0

27)      A 100,000 square foot office building in Oakland, California is fully leased to a single

tenant at $30.00 PSF per year. The building’s expenses total $7.50 PSF per year and an expense stop in all the leases is set at $6.00 PSF per year. What is the total annual

expense amount paid by the tenant?

(A) $750,000

(B) $600,000

(C) $150,000

(D) $0

28)      A 100,000 square foot office building in Oakland, California is fully leased to a single

tenant at $30.00 PSF per year. The building’s expenses total $7.50 PSF per year and an expense stop in all the leases is set at $6.00 PSF per year. What is the annual net

operating income to the owner?

(A) $3,000,000

(B) $2,400,000

(C) $2,250,000

(D) $150,000

29)      The limited liability company is the preferred investment vehicle for real estate because:

(A) No member of the LLC will have unlimited liability

(B) In some states, even single member LLCs are permitted

(C) Decision-making can be delegated to a third party who is not a member of the LLC

(D) All the above are correct

30)       In the event of a foreclosure of a real property investment by a first mortgage lender, a

second mortgage lender with a non-recourse loan will:

(A) Lose the security of its real estate mortgage but have the right to sue the borrower for repayment of the outstanding loan balance

(B) Retain the security of its real estate mortgage and have the right to sue the borrower for repayment of the outstanding loan balance

(C) Lose the security of its real estate mortgage and not have the right to sue the borrower for repayment of the outstanding loan balance

(D) Retain the security of its real estate mortgage but not have the right to sue the borrower for repayment of the outstanding loan balance

36)      A 39,000 square foot, single tenant fully leased office building in Topeka, Kansas was  purchased for $7,800,000. The tenant had a 10-year lease at a flat rental rate of $2.00 per square foot per month with an operating expense stop of $0.70 per square foot per month. The building’s first-year annual operating expenses totaled $360,000. The

property was acquired with a $5,000,000 purchase money mortgage loan from Bank of America at a 4.75% annual interest rate that fully amortized over 30 years and was payable monthly. The building/land ratio for tax depreciation purposes was 80%. What was the taxable income for the first year?

(A) $608,400

(B) $448,400

(C) $372,565

(D) $212,565

37)      A constant amortization mortgage is not typically available in the mortgage lending

business because when it is compared to a constant payment mortgage with the same principal amount, interest rate and amortization period, the constant amortization mortgage will have:

(A) Lower monthly payments during the early years of the loan and more total interest paid over the life of the loan

(B) Higher monthly payments during the early years of the loan and less total interest paid over the life of the loan

(C) Lower monthly payments during the early years of the loan and less total interest paid over the life of the loan

(D) Higher monthly payments during the early years of the loan and more total interest paid over the life of the loan

38)      A portfolio of investments whose individual expected returns are not highly correlated:

(A) Will provide a diversification benefit and lower the risk of the portfolio

(B) Will provide a diversification benefit and raise the risk of the portfolio

(C) Will not provide a diversification benefit and will raise the risk of the portfolio

(D) Will not provide a diversification benefit but will lower the risk of the portfolio

39)      A sale-leaseback transaction might be used by a corporate owner of highly appreciated real estate assets in order to:

(A) Pay monthly rent to the new owner of those properties

(B) Obtain significant liquidity from the sale of those appreciated properties

(C) Pay capital gain taxes on the significant appreciation in the value of the properties

(D) Lose the future appreciation in the value of the real estate

40)      All of the following are among the reasons why real estate development is the riskiest

aspect of the real estate business, EXCEPT:

(A) Development projects can be significantly affected by construction delays and cost overruns

(B) Construction loans are typically recourse to the developer

(C) Market conditions at the time of construction completion might be much worse than originally projected

(D) Tenant demand and rent levels will typically be higher for well designed, newly built real estate projects as compared to older projects in the same areas

41)      When a real estate investor borrowed $6.6 million from a local bank for a 66,000 square

foot shopping center acquisition in El Segundo, California, the borrower signed two documents to evidence the loan and security agreement. They were:

(A) A note and a grant deed

(B) A deed of trust and an abstract of title

(C) An escrow agreement and a loan agreement

(D) A promissory note and a deed of trust

42)       “Conforming” mortgage loans conform to the current loan underwriting guidelines of:

(A) The Federal Reserve System

(B) GAAP

(C) Fannie Mae and Freddie Mac

(D) Ginnie Mae

43)      An appraisal of a single-family residence will primarily rely on which appraisal method:

(A) Comparable sales

(B) Capitalization of income

(C) Replacement cost

(D) Abstract of title

44)      When a shopping center owner received a $10 million offer to buy her property that was

now free and clear of any mortgage debt, she was delighted but did not want to pay the substantial capital gain taxes on the sale given her very low cost basis of the property given that she had acquired the property 25 years ago at a price of $1.8 million. She might:

(A) Sell the shopping center for $10 million and buy another shopping center for $20 million with a new 50% LTV first mortgage loan in a Section 1031 exchange

(B) Sell the property in a transaction that uses the installment sale method whereby she would receive the sale proceeds over a period of several years

(C) Keep the property and put a new 65% LTV mortgage loan on the property and enjoy the $6.5 million of cash proceeds from the financing without paying any taxes on the amount borrowed

(D) All of these answers are correct

45)      Rising interest rates will tend to:

(A) Increase cap rates and increase property values

(B) Reduce cap rates and increase property values

(C) Increase cap rates and reduce property values

(D) Reduce cap rates and reduce property values

46)      A triple net lease generally requires the tenant to pay all of the following, EXCEPT:

(A) Annual property taxes

(B) Building insurance

(C) Repairs and maintenance

(D) Mortgage loan payments

47)      Publicly listed real estate investment trusts typically pay higher dividend yields than other

publicly traded stocks because in order to qualify as a REIT and avoid paying entity level tax under federal tax law, a REIT:

(A)  Must pay out at least 75% of its NOI as dividends

(B)  Must have at least 20% of its assets in taxable REIT subsidiaries

(C)  Must have at least 95% of its assets in REIT stocks and other real estate securities

(D)  Must pay out at least 90% of its taxable income as dividends

48)      Under current tax laws, real estate tax depreciation is either 27.5 or 39 years straight line,

depending on the type of investment property. Tax depreciation is a benefit for real estate owners because it:

(A) Reduces taxable income thereby increasing the income tax payable

(B) Increases taxable income thereby increasing the income tax payable

(C) Reduces taxable income thereby reducing the income tax payable

(D) Increases taxable income thereby reducing the income tax payable

49)       Fannie Mae and Freddie Mac are the key players in the U.S. secondary mortgage

market, and together they buy almost half of all:

(A) Residential mortgage loans

(B) Commercial mortgage backed securities

(C) B-pieces from CMBS securitization transactions

(D) Bank securities

50)      Commercial mortgage backed securities differ from residential mortgage backed securities in that:

(A) CMBS are created by securitizing residential mortgage loans

(B) RMBS payments are derived from the cash flows from a pool of government bonds

(C) Default risk is more significant for CMBS than for RMBS

(D) Prepayment risk is more significant for CMBS than for RMBS