Exam 201. Applied Real Estate Investment and Lease Analysis

Financing Q2

Calculate the Default Ratio (Breakeven Point) using the following information:

Operating Expenses:
${a}
Debt Service:
${b}
Potential Gross Income:
$534,000
 
(Answer requires 2 decimal places)

Financing Q3

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)

Lease Analysis Q1

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)

Lease Analysis Q7

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)

Lease Analysis Q8

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)

No Recurring Expenses Q2

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)

Basic Questions Q13

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%?
 
image
 
Answer: ${#1} (No commas)

Basic Questions Q14

If the Net Present Value at 11% is <$300,000> the investor has to {#1} in order to achieve the desired return of 11%.

Basic Questions Q15

If the Net Present Value at 12% is $200,000 the investor has to {#1} in order to achieve the desired return of 12%.

Basic Questions Q4

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%.

Basic Questions Q5

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%.

Basic Questions Q8

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)

Buy vs. Lease Analysis Q2

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?

image 
 
Answer: {#1} (No commas)

Creative Financing Q2

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}

Creative Financing Q2 2

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}

IRR NPV MIRR Q27

How much should an investor pay for this retail center if they wanted a 13% Internal Rate of Return (IRR)

image


Answer: ${#1} (No commas)

Lease Analysis Q2

A landlord has 10,000 Sq. Ft to lease and has received three proposals as follows:
 

 
Proposal 1
Proposal 2
Proposal 3
Rent Rate
$14.00 per Sq. Ft per Yr. for five years then $16.23 for five years
$6.00 per Sq. Ft per Yr. for five years then $18.55 for five years
$17.00 per Sq. Ft per Yr. for five years then $22.75 for five years
Leasehold improvements to be provided by Landlord
$15,000
$150,000
$200,000
Free rent
Year 1 - 2 months
Year 1 – 2 months
2 months each year for three years
 
Cash Flows and Net Effective rents

image

1. From a Net Effective Rent perspective which is the best proposal for the landlord?
{#1}
 
2. If the landlord takes into account the impact of the rent on the property value which is the best deal?
{#2}

3. Which do you think is the overall best deal from a financial perspective for the Landlord?
{#3}

Real Esate Analysis Q10

How much should an investor pay if she wants a desired return (IRR) of 14% before tax.

image
 
Answer: ${#1} Million.

Real Estate Analysis Q1

Which of the following are a good idea before you start carrying out real estate investment analysis?

  1. Get the financial information and immediately perform an investment analysis to see if the investment makes sense. {#1}
     
  2. Think about how you are going to think. {#2}

  3. Decide the type of analysis such as investment, Buy versus Lease or Hold versus Sell analysis. {#3}
     
  4. Decide whether you want to use monthly or yearly projections {#4}

  5. Using the information provided by the seller to immediately calculate the Internal Rate of Return (IRR). {#5}
     
  6. Because real estate income properties are complex investments immediately carry out a complex analysis using a lot of imputs instead of carrying out a simple analysis and then refining it. {#6}
     
  7. Decide on the analysis period {#7}

Real Estate Analysis Q7

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}

Real Estate Analysis Q8

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?
 

  1. Regular maintenance expenses {#1}
     
  2. Lease commissions {#2}
     
  3. Lease hold improvements {#3}
     
  4. Mortgage brokerage fee {#4}
     
  5. Utilities {#5}
     
  6. Replacing the roof {#6}

Risk Analysis Q4

The higher the risk the {#1} the desired return on investment (IRR).

Risk Analysis Q5

Low risk investments generally command a {#1} price than high risk investments.

Risk Analysis Q6

Financial leverage generally {#1} the return on investment (IRR) but {#2} the investment risk.

Risk Analysis Q7

If the first mortgage is increased the Default Ratio (Breakeven Point) will {#1}.

Sensitivity Analysis Q2

The financial returns are often highly sensitive to:

Cap Rate
{#1}
Rent Rate
{#2}
Interest Rate
{#3}
Property Taxes
{#4}
Real Estate Commissions
{#5}
Rent increases
{#6}
Mortgage Brokerage Fee
{#7}
Major Capital Expenditures
{#8}
Inflation rates
{#9}
Financial leverage
{#10}
Purchase Price
{#11}
Capital Appreciation
{#12}
Appraisal Fees
{#13}

Sensitivity Analysis Q3

When carrying out investment analysis you should try and verify the expenses. Which of the following expenses are easy to verify?

 

Property Taxes
{#1}
Maintenance
{#2}
Garbage Collection
{#3}
Future Capital Expenditures
{#4}
Increases in utility costs
{#5}
Elevator service contract
{#6}

Basic Questions Q1

When carrying out long term investment analysis a good starting point is to:

Basic Questions Q10

The Cap Rate for an income property is generally:

Basic Questions Q11

Which is the best Investment?

Basic Questions Q12

The Net Present Value (NPV) is a useful financial measure because it:

Basic Questions Q16

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:

Basic Questions Q17

Which statement is correct? The Modified Internal Rate of Return (MIRR) takes into account:

Basic Questions Q2

If the Net Present Value (NPV) at 12% is <$320,000> the Internal Rate of Return (IRR) is:

Basic Questions Q21

If the Internal Rate of Return (IRR) is 13% the:

Basic Questions Q3

If the Net Present Value (NPV) at 9% is $220,000 the Internal Rate of Return (IRR) is:

Basic Questions Q6

A good benchmark for comparing the Internal Rate of Return (IRR) for an investment property is the:

Basic Questions Q7

Generally, the Internal Rate of Return (IRR) should be:

Basic Questions Q9

If the second mortgage rate for a property is 8%, which of the following best reflects the investor's desired return (IRR)?

Buy vs. Lease Analysis Q1

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%
 
image 

Buy vs. Lease Analysis Q3

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?

image 

Creative Financing Q1

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
 
image 

Creative Financing Q4

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)?

Creative Financing Q5

When exploring creative seller financing it is wise to check if the first mortgage prohibits a second mortgage being placed on the property

Financing Q4

Which of these financial measures is not used when determining the financing now or in the future?

Hold versus Sell Analysis Q1

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.

image 

Hold versus Sell Analysis Q2

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?

image 

IRR NPV MIRR Q1

Is it possible to calculate the Internal Rate of Return (IRR) for the following investment?

image 

IRR NPV MIRR Q12

If an investment has 100% financing the Internal Rate of Return (IRR) will be:

IRR NPV MIRR Q2

For the following investment is it possible that there may be more than one valid Internal Rate of Return (IRR)?

image 

IRR NPV MIRR Q24

Which of the following investments may have more than one valid Internal Rate of Return?

image

IRR NPV MIRR Q25

Which of the following investments has more than one sign change?
 

Net Cash Flow
Year
Investment A
Investment B
0
<400,000>
<650,000>
1
30,000
30,000
2
40,000
40,000
3
<150,000>
45,000
4
70,000
65,000
5
80,000
80,000
6
430,000
700,000

IRR NPV MIRR Q29

Which is the best financial measure for a phased real estate development

IRR NPV MIRR Q3

When using the Modified Internal Rate of Return (MIRR) the short term reinvestment rate refers to:

IRR NPV MIRR Q4

When using the Modified Internal Rate of Return (MIRR) the short term financing rate refers to:

IRR NPV MIRR Q6

If an investment delivers a positive cash flow every year then the Modified Internal Rate of Return (MIRR) will most likely deliver:

IRR NPV MIRR Q7

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?

Lease Analysis Q4

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?

Lease Analysis Q5

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?

Lease Analysis Q6

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:

Mutually Exclusive Investment Analysis Q1

The following is an example of:

image 

Mutually Exclusive Investment Analysis Q2

Which of the following are not examples of a mutually exclusive investment decision?

 

Mutually Exclusive Investment Analysis Q3

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: 

Mutually Exclusive Investment Analysis Q4

The process for analyzing mutually exclusive investments such as "Buy vs Lease" is to:

  1. Develop the Net Cash Flow of Buy
  2. Develop the Net Cash Flow of Sell
  3. Calculate the differential cash flow "Net Cash Flow of Buy - Net Cash Flow of Lease"

Real Estate Analysis Q11

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?

image

Real Estate Analysis Q2

A manufacturer who is tired of paying rent and wants to explore the advantages of owning instead of renting, he should carry out:

Real Estate Analysis Q3

If an owner of an investment property wants to decide whether to keep or sell the property they should carry out:

Real Estate Analysis Q4

An investor is trying to decide whether to buy an office building and hold for ten years. This investment opportunity should be analyzed using:

Real Estate Analysis Q6

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?

Risk Analysis Q1

Which of the following are good measures of the investment risk? (2 marks)

Risk Analysis Q10

Which one of the following investments is likely the most risky?

  image 

Risk Analysis Q11

Investing in real estate involves risk management. Which one of the following would not be a strategy to transfer the risk to another party?

Risk Analysis Q12

For a more risky investment the discount rate for calculating the Net Present Value (NPV) should be:

Risk Analysis Q13

Risk can be reduced by gathering more information. Which one of the following is an example of not gathering more information?

Risk Analysis Q14

Which one of the following is not a method for assessing risk?

Risk Analysis Q2

Which is the most risky investment?

 
image 

Risk Analysis Q3

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?

Sensitivity Analysis Q1

Which one of the following best explains sensitivity analysis?

Basic Questions Q18

The Modified Internal Rate of Return (MIRR) lowers the Net Present Value (NPV)

Basic Questions Q19

The Modified Internal Rate of Return (MIRR) is a more popular measure than the Internal Rate of Return (IRR).

Basic Questions Q20

The Modified Internal Rate of Return (MIRR) is a less popular measure than the Internal Rate of Return (IRR).

Creative Financing Q3

A good starting point when exploring creative financing is to:

 

a.
Carry out a conventional analysis.
b.
Examine the Operating Cash Flow before tax.
c.
Decide on a possible financial arrangement.
d.
Run the analysis with the revised creative financing.
e.
Look at the financial results from the seller and the buyers perspective.
f.
If the results don't look fair to either the buyer or the seller explore another creative financing option.

Creative Financing Q6

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.

Creative Financing Q7

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.

Creative Financing Q8

When exploring creative seller financing it is wise to have the seller's accountant check the tax consequences of carrying the second mortgage.

Financing Q1

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.

Financing Q5

The use of financial leverage generally reduces the Internal Rate of Return (IRR).

Financing Q6

The use of financial leverage generally increases the return on investment (IRR)

IRR NPV MIRR Q10

For any cash flow generated by investing in commercial real estate you can always calculate the Net Present Value (NPV)

IRR NPV MIRR Q11

If you can't calculate the Internal Rate of Return (IRR) then you can't calculate the Net Present Value (NPV)

IRR NPV MIRR Q13

If an investment has 100% financing it is not possible to calculate the Net Present Value (NPV)

IRR NPV MIRR Q14

Under certain cirumstances there may be more than one valid answer for the Internal Rate of Return (IRR)

IRR NPV MIRR Q15

If there is only one sign change in a cash flow there is only one Internal Rate of Return (IRR)

IRR NPV MIRR Q16

If there is more than one sign change in a cash flow there may be more than one valid Internal Rate of Return (IRR)

IRR NPV MIRR Q17

The Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value (NPV) equal to the first mortgage rate.

IRR NPV MIRR Q18

The Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value (NPV) zero.

IRR NPV MIRR Q19

A financial calculator can always calculate the correct Internal Rate of Return (IRR).

IRR NPV MIRR Q20

When there is more than one sign change in a cash flow, a financial calculator always calculates the correct Internal Rate of Return (IRR).

IRR NPV MIRR Q21

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.

IRR NPV MIRR Q22

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).

IRR NPV MIRR Q23

For any cash flow there is always at least one Internal Rate of Return (IRR) that can be calculated.

IRR NPV MIRR Q26

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)

IRR NPV MIRR Q28

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.

IRR NPV MIRR Q5

Most investors use the Modified Internal Rate of Return (MIRR) because the MIRR gives a more accurate estimate of the true return.

IRR NPV MIRR Q8

For any long term real estate investment there is only one answer for the Internal Rate of Return (IRR)

IRR NPV MIRR Q9

For any long term real estate investment there may be circumstances where you can't calculate the Internal Rate of Return (IRR)

Lease Analysis Q3

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.

Mutually Exclusive Investment Analysis Q5

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.

No Recurring Expenses Q1

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.

Real Estate Analysis Q5

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.

Real Estate Analysis Q9

Certain expenses such as:

  1. A leasing fee for re-leasing the space after a tenant moved out
  2. Replacement of the hot water tank
should not be included in the Net Operating Income (NOI) when using a Cap Rate to determine the value of the property.

Risk Analysis Q8

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.

Risk Analysis Q9

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).