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Fina 3387 Real Estate Finance Exam 1 Spring 2015

Multiple choice (3 points each)
1. The categories of real estate returns are:
a. Cash Flow
b. Price Appreciation
c. Tax Shelter
d. Equity Buildup
e. All of the above
2. When accumulated depreciation is subtracted from the owner's investment in a
property (which includes the portion bought with debt), the resulting figure is
termed the:
a. Initial Equity
b. Deferred Equity
c. Taxable Income
d. Taxable Basis
e. None of the above
3. The two sources of price appreciation are real price changes and:
a. Nominal price changes
b. Deflation
c. Inflation
d. Hedging
e. None of the above
4. Positive leverage occurs when:
a. The cost of debt is less than the total return on the asset
b. The cost of debt is more than the total return on the asset
c. The cost of debt is equal to the total return on the asset
d. The cost of debt is not considered in the analysis
e. None of the above

Completely controllable d. Financially feasible b. None of the above 7. Exchange value b. Completely uncontrollable e. Does not affect it d.5. Which of the following items does not directly impact the definition of Highest & Best Use? a. Appreciation in value net of transaction costs c. Economic risks are usually: a. Physically possible c. Market Value c. Decreases it considerably e. Reasonably probable e. Investment Value d. None of the above 9. Somewhat negotiable c. Tax shelters b. Which of the following is NOT a Source of Return on Direct Real Estate? a. Increases it c. More leverage has the following impact on the variability of returns: a. IRR d. None of the above 8. All of the above are sources of return 6. Use Value e. They all directly impact the definition . Decreases it slightly b. Rent e. Completely negotiable b. Easily amortizable d. The maximum price a buyer would pay or the minimum price a seller would accept on a property of interest is called: a.

None of the above 14.10.Of all the below. Cost of lease-up or absorption d. Single Story Retail has the lowest improved site values and the highest option value b. All of the above 13. Quantity Survey e.Equilibrium value: a. Single Story Retail and Hi Rise Hotel property types. Indexed cost update c.Of Surface Parking Lots. Cost of reproduction c. Comparative unit . None of the above 12. Hi Rise Hotels have the highest improved site values and the highest option value c. Surface Parking Lots have the lowest improved site values and the highest option value d. the following statement is generally true: a. a. the __________ method is most accurate in estimating the cost new. Is always the Market Value b. Is never the Market Value c. None of the above 11.The __________ method of valuation can be used only if the building is fairly new (less than 10 years). Cost of replacement b. Hi Rise Hotels have the lowest improved site values and the highest option value e.An insurance company will consider __________ as an objective of the valuation opinion. Is sometimes the Liquidation Value e. a. Comparative unit b. Cost of physical and functional depreciation e. a. Is always the Liquidation Value d. Unit in place d.

II & III 17. Quantity Survey e. None of the above 16. 3 c. __________ has the maximum impact. Indexed cost update c. I & II c. a. Physical II. Unit in place d. a. I & III e. Quantity Survey e. 5 e. I b. Functional a.While adjusting the comps to make the price equivalent to subject property. Location . I. II & III d. 2 b.In the __________ method of valuation the cost as new of building is found by taking bids from subcontractors on all building components and summed along with general contractor fees and normal development fees. Indexed cost update c.The minimum number of comps is __________ on a form report.b. None of the above 15. Comparative unit b. Financing b. 10 18. a. Locational or External III. Quality c. Size d. Unit in place d. 4 d.Which types are considered while deducting accrued depreciation from the cost as new: I.

Time .e.

Information is available on all the factors influencing property value a.If there are three comps then any weight that is less than __________ means the comp is not valid comp. All comps should have equal weight 22. There is no premium 20.Which of the following cannot be shown as operating expenses? a. Leasing commissions b. i. 10% d. There are many similar properties in the submarket ii. 10% to 13% d. The market is relatively stable over time iv. 1% to 2% b. 15% to 20% e. 25% e. i & ii b.19. i & ii c. 7% c. iii & iv d. 5% to 6% c. Utilities paid by tenants e. ii & iii 21. iii & iv e. Transactions occur frequently in the submarket iii. a. a. Advertising expenses 23.Which is the single most important estimate for the income approach to value? .New properties generally commands a premium in the market of __________ over resales (keeping all else the same). Property taxes c. 3% b. Management expenses if owner self-manages the property d. ii.Market value approach works best when which of the following conditions are met: i.

Higher the expectation of return to equity investor d. II & III e.5 (debt = equity) a. None of the above 25. Lower the volatility of cash returns to equity for owner c. I b. Expense ratio 24. Net operating income d. II c. Break even point 26.Which of the following gives the maximum allowable vacancy for property to be able to take care of all the cash needs? a. None of the above . Cash flow before taxes e. the: a. Gross Rent b. Property is 100% equity II. Lower the break even point e.Cash on cash and cap rate return would be identical only if: I.a. Cash on Cash d. LTV=0. Debt coverage ratio c. Expense ratio b. Effective Gross Rent c. III d.The higher the LTV (loan to value) ratio. Break even point is 1.0 III. Return on asset e. Lower the risk to lender b.

The dispersion in estimation of market value are due to: i. Property insurance c. Parking lot maintenance e. (5 POINTS) ANSWER . i b. Roof repair 30. Cash on Cash d. Expense ratio b. the NOI in the year following the sale is typically divided by the: a. Break even point 28. None of the above 29. Calculation errors iii. Return on asset e. ii & iii d. i & ii e. Omitted variables ii.Define the elements required in the definition of H&B use.In calculating the reversion value. ii c. Cash rate b. i & iii Short answer 31. Equity Base d.Which of the following gives an indication on initial (going-in) profitability of a property? a. Debt coverage ratio c. Random error or noise a.27. Property taxes d. Leasing commissions b. Internal Rate of Return c.Which of following expenses is a function of tenant turnover? a. Required Rate of Return e.

Reasonably probable: The speculation should not be too far in the future. say 90% or more. Also functional depreciation for layout. and that results in the highest value as of the date of the appraisal. materials and design.The highest and best use of a property is as the reasonably probable and legal use of vacant land or improved property. ANSWER Step 1: Estimate the land value based on land as if vacant . Physically probable: The anticipated use should be physically possible on the land location. Step 2: Estimate the structure cost new either as replacement (cheapest) or reproduction (identical replica). design that dosen’t allow existing structure to compete with newer similar structures. they must be able to determine if and when new alternative uses will be successful or financially feasible. Step 3: Estimate the “lease up or absorption cost” to bring the building to full occupancy Step 4: Deduct accrued depreciation to account for physical depreciation wear and tear of existing structure. If a change in the land use regulations is possible with reasonable probability. function. . then considering a change of use that is inconsistent with current laws might be part of the analysis. If we speculate too far into the future then we have less confidence that we can predict the likely uses for the site. Legal use: The use should be legally possible on that land location. which is physically each component of the structure is is estimated. and unit.Briefly describe the four steps of cost approach to value. It would depend on the slope of the land. appropriately supported. Estimate may use the comparative –unit method based on recent similar structures. If the change in legal constraints is not likely to be approved without high legal costs then the current legal controls should not be ignored. surrounding influences on construction methods. and current technology. Financially feasible: The analyst must be able to be creative enough to spot opportunities and trends that might produce higher site values. 32. financially feasible. indexed cost update usually based on current cost per sqare foot for similar structure. subsoil. And they must assume that investor/developers will also be able to see these same opportunities and last.