Calculate the Default Ratio (Breakeven Point) using the following information:
If the Net Operating Income (NOI) for a building is ${a} and the annual mortgage payment or debt service is ${b} calculate the Debt Service Ratio. (Answer requires two decimal places)
Calculate the Net Effective Rent at 10% using the following information: Present Value of "Lease Payments" at 10%: ${a} Rentable Area: 4,000 Sq. Ft Time Period: 10 years (Answer requires two decimal places)
Calculate the increase in the value of the property based on the following information: Cap Rate: 6.50% Rent Increase: From ${a} to ${b} Rentable Area: 5,000 Sq. Ft (Round your answer to the nearest dollar. Do not use commas)
A landlord can increase the rent from $25.00 to $28.00 psf. per year if he provides the tenant with ${a} worth of leasehold improvements, free rent and a cash signing bonus. The rentable area is 10,000 Sq. Ft. What is the net benefit to the landlord if the Cap Rate is 7%? ((Round your answer to the nearest dollar. Do not use commas)
Non recurring expenses such as replacing carpeting for ${a} should not be included in calculating the Net Operating Income (NOI) when using a Cap Rate to calculate the value of the property. If the ${a} for replacing the carpets is included as an expense when calculating the Net Operating Income (NOI) how much will this drop the value of the property if the Cap Rate is {b}%? (Round your answer to the nearest dollar. Do not use commas)
If the Investor's desired Return (IRR) is 13.00% how much does the property value have to be dropped in order to obtain the desired return (IRR) of 13%? Answer: ${#1} (No commas)
If the Net Present Value at 11% is <$300,000> the investor has to {#1} in order to achieve the desired return of 11%.
If the Net Present Value at 12% is $200,000 the investor has to {#1} in order to achieve the desired return of 12%.
If the Investors Desired Return (IRR) is 13% and the Net Present Value (NPV) at 13% is <$350,000>, the purchase price has to be {#1} by $350,000 to achieve a desired return (IRR) of 13%.
If the Investors Desired Return (IRR) is 15% and the Net Present Value (NPV) at 15% is $180,000, the purchase price has to be {#1} by $180,000 to achieve a desired return (IRR) of 15%.
The Internal Rate of Return (IRR) is generally {#1} than the Cap Rate. The more risky the investment, the {#2} the desired return on investment (IRR)
An accounting firm who thinks it would be wise to own their own building instead of paying rent if they could get a return on investment (Internal Rate of Return) of 14% after tax. What is the maximum price they should pay for the property? Answer: {#1} (No commas)
Which of the following are examples of creative financing? Interest Only Mortgage {#1} Gradual Payment Mortgage {#2} Variable Rate Mortgage {#3} A standard, fully amortized Mortgage {#4} Seller take-back Mortgage {#5}
Which of the following are primary goals of creative financing? Reducing the investment risk {#1} Reducing the equity required by the buyer {#2} Increasing the return (IRR) to the buyer {#3} To fascilitate the sale through the use of creative financing {#4}
How much should an investor pay for this retail center if they wanted a 13% Internal Rate of Return (IRR) Answer: ${#1} (No commas)
A landlord has 10,000 Sq. Ft to lease and has received three proposals as follows:
How much should an investor pay if she wants a desired return (IRR) of 14% before tax. Answer: ${#1} Million.
Which of the following are a good idea before you start carrying out real estate investment analysis?
There are several types of real estate analysis that should always be carried out after tax. For investors and corporations that have to pay tax, which of the following analyses should always be done after tax. Investment Analysis {#1} Buy versus Lease Analysis {#2} Lease Analysis {#3} Hold versus Sell Analysis {#4}
Which of the following expenses should not be included in the calculation of the Net Operating Income (NOI) when using the Cap Rate to determine the property value?
The higher the risk the {#1} the desired return on investment (IRR).
Low risk investments generally command a {#1} price than high risk investments.
Financial leverage generally {#1} the return on investment (IRR) but {#2} the investment risk.
If the first mortgage is increased the Default Ratio (Breakeven Point) will {#1}.
The financial returns are often highly sensitive to:
When carrying out investment analysis you should try and verify the expenses. Which of the following expenses are easy to verify?
When carrying out long term investment analysis a good starting point is to:
The Cap Rate for an income property is generally:
Which is the best Investment?
The Net Present Value (NPV) is a useful financial measure because it:
If a potential investment in an income property generates a positive cash flow every year, the "Reinvestment Assumption" used in the calculation of the Internal Rate of Return (IRR) can cause the return to be:
Which statement is correct? The Modified Internal Rate of Return (MIRR) takes into account:
If the Net Present Value (NPV) at 12% is <$320,000> the Internal Rate of Return (IRR) is:
If the Internal Rate of Return (IRR) is 13% the:
If the Net Present Value (NPV) at 9% is $220,000 the Internal Rate of Return (IRR) is:
A good benchmark for comparing the Internal Rate of Return (IRR) for an investment property is the:
Generally, the Internal Rate of Return (IRR) should be:
If the second mortgage rate for a property is 8%, which of the following best reflects the investor's desired return (IRR)?
Based on the following “Buy vs. Lease Analysis” which was carried out by an engineering firm who is considering buying instead of continuing to pay rent. Should they “Buy” or continue “Leasing”? Their desired return IRR on investment (Discount rate) after tax is 8.45%
A firm that is currently renting space is considering buying their own building. If their desired return (Internal Rate of Return) after tax is 8.00% should they continue to rent or buy the building?
An investor is considering buying this property but it requires equity of 36%, which he feels is too much money.Based on the following cash flow is it possible, using creative financing to have the seller provide a second mortgage for five years that would reduce the equity from 37% to 20%? The value of the property is around $6,000,000
Using creative financing with the seller providing an attractive and unique second mortgage, is it possible to structure a deal where the investor increases the purchase price but at the same time increases his return on investment (IRR)?
When exploring creative seller financing it is wise to check if the first mortgage prohibits a second mortgage being placed on the property
Which of these financial measures is not used when determining the financing now or in the future?
An investor who owns an office building which was bought a number of years ago is trying to decide whether to hold or sell the building. Based on the following differential cash flow analysis should he hold or sell the property? The investor’s desired return on investment (IRR) or Discount Rate is 8.45% after tax.
He should hold the property.
He should sell the property.
An investor who owns an office building which was bought a number of years ago is trying to decide whether to hold or sell the building. Based on the following graph should he hold or sell the property?
Is it possible to calculate the Internal Rate of Return (IRR) for the following investment?
If an investment has 100% financing the Internal Rate of Return (IRR) will be:
For the following investment is it possible that there may be more than one valid Internal Rate of Return (IRR)?
Which of the following investments may have more than one valid Internal Rate of Return?
Investment A
Investment B
Which of the following investments has more than one sign change?
Which is the best financial measure for a phased real estate development
When using the Modified Internal Rate of Return (MIRR) the short term reinvestment rate refers to:
When using the Modified Internal Rate of Return (MIRR) the short term financing rate refers to:
If an investment delivers a positive cash flow every year then the Modified Internal Rate of Return (MIRR) will most likely deliver:
When working with investors you need to establish which financial returns they like to use. Which one of the following is not a financial return?
Losing a good tenant can be very costly to a landlord. Which one of the following is not a cost associated with losing a tenant and having to re-lease the space?
A landlord has received an offer by a tenant to rent his space for $22 psf. per Yr for 7 years. The landlord would like the rent to be $25 psf. instead of $22 psf. per year. Is it possible to arrange a deal where the landlord gets the $25 psf. per year but offers free rent and to pay for the tenant's leasehold improvements, which results in the same Net Effective Rent for the tenant?
Yes.
No.
Often landlords when negotiating a lease will negotiate hard for a high lease rate but offer generous free rent periods and provide the tenant with inducements such as a cash signing bonus. The main motivation for the landlord is:
The following is an example of:
Which of the following are not examples of a mutually exclusive investment decision?
Is it true that in our daily lives, even though we may not be aware of it we are constantly making mutually exclusive decisions such as:
The process for analyzing mutually exclusive investments such as "Buy vs Lease" is to:
Correct
Incorrect
Appraisers like to establish how much of the "Present Value" is being generated by the: a) Net Operating Income (NOI) and b) Sales Proceeds (Reversionary Value) This helps in deciding if the projections are realistic or not. In the following example are the analysis and projections realistic or relying too much on capital appreciation?
A manufacturer who is tired of paying rent and wants to explore the advantages of owning instead of renting, he should carry out:
If an owner of an investment property wants to decide whether to keep or sell the property they should carry out:
An investor is trying to decide whether to buy an office building and hold for ten years. This investment opportunity should be analyzed using:
Sometimes when carrying out real estate analysis you may want to explore different "Holding Periods" such as 5 or 10 years. Which statement is correct?
Which of the following are good measures of the investment risk? (2 marks)
Which one of the following investments is likely the most risky?
Investing in real estate involves risk management. Which one of the following would not be a strategy to transfer the risk to another party?
For a more risky investment the discount rate for calculating the Net Present Value (NPV) should be:
Risk can be reduced by gathering more information. Which one of the following is an example of not gathering more information?
Which one of the following is not a method for assessing risk?
Which is the most risky investment?
Which one of the following would not be considered a business or market risk, which are risks external to the property and beyond the control of the investor?
Which one of the following best explains sensitivity analysis?
The Modified Internal Rate of Return (MIRR) lowers the Net Present Value (NPV)
The Modified Internal Rate of Return (MIRR) is a more popular measure than the Internal Rate of Return (IRR).
The Modified Internal Rate of Return (MIRR) is a less popular measure than the Internal Rate of Return (IRR).
A good starting point when exploring creative financing is to:
When exploring creative seller financing you need to develop the yearly operating cash flow using a conventional mortgage to see if there is sufficient cash flow to support an acceptable second mortgage.
Using creative seller financing to put a deal together is a trial and error process where you explore creative financing options until you find one that works for both the seller and the buyer.
When exploring creative seller financing it is wise to have the seller's accountant check the tax consequences of carrying the second mortgage.
A lender uses the Loan to Value Ratio and the Debt Service or Coverage Ratio to determine the loan amount and then selects the method that provides the largest loan amount.
The use of financial leverage generally reduces the Internal Rate of Return (IRR).
The use of financial leverage generally increases the return on investment (IRR)
For any cash flow generated by investing in commercial real estate you can always calculate the Net Present Value (NPV)
If you can't calculate the Internal Rate of Return (IRR) then you can't calculate the Net Present Value (NPV)
If an investment has 100% financing it is not possible to calculate the Net Present Value (NPV)
Under certain cirumstances there may be more than one valid answer for the Internal Rate of Return (IRR)
If there is only one sign change in a cash flow there is only one Internal Rate of Return (IRR)
If there is more than one sign change in a cash flow there may be more than one valid Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value (NPV) equal to the first mortgage rate.
The Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value (NPV) zero.
A financial calculator can always calculate the correct Internal Rate of Return (IRR).
When there is more than one sign change in a cash flow, a financial calculator always calculates the correct Internal Rate of Return (IRR).
If the cash flow from an investment only has one sign change you know that the resulting Internal Rate of Return (IRR) is most likely correct.
If the cash flow from an investment has more than one sign change from negative to positive you need to be skeptical as to whether the Internal Rate of Return (IRR) is correct and it might be safer to focus on the Net Present Value (NPV).
For any cash flow there is always at least one Internal Rate of Return (IRR) that can be calculated.
If the Net Cash Flow has several sign changes we have to be cautious about using the Internal Rate of Return (IRR) because there may be more than one valid answer for the Internal Rate of Return (IRR)
In a phased land subdivision development where there can be wild swings between positive and negative cash flows because of development expenses, followed by sales, followed by more development expenses, followed by more sales...etc the Internal Rate of Return (IRR) is the best financial measure because it takes into account the timing of the cash flows.
Most investors use the Modified Internal Rate of Return (MIRR) because the MIRR gives a more accurate estimate of the true return.
For any long term real estate investment there is only one answer for the Internal Rate of Return (IRR)
For any long term real estate investment there may be circumstances where you can't calculate the Internal Rate of Return (IRR)
In a lease negotiation a landlord may be better off maintaining a higher rent rate but offering the tenant a substantial amount for leasehold improvements and provide a generous free rent period.
The best way to analyze mutually exclusive investments such as "Buy vs Lease" or "Hold vs Sell" is to carry out long term real estate investment analysis and calculate the Internal Rate of Return (IRR). There is another approach called "Differential Cash Flow Analysis" where you take the "Net Cash Flow. Buy - Net Cash Flow. Lease" which is called the differential cash flow but this approach yields an incorrect answer.
Non recurring expenses such as replacing the carpets should not be included as an operating expense when using the Cap Rate to determine the value.
A reasonable analysis period for a rental apartment building is five years and for a commercial building such as an office, retail or industrial building is ten years to take into account the increase in the lease rate at the end of the lease term, which is often 3 or 5 years.
Certain expenses such as:
If the cash flow is predictable and the tenants are financially strong you may be able to safely decrease the Debt Coverage or Service Ratio and increase the Default Ratio (Breakeven Point) by increasing the first mortgage.
If the cash flow is unstable and subject to changes you should decrease the use of financial leverage by increasing the Debt Service or Coverage Ratio and decrease the Default Ratio (Breakeven Point).