ACFM 266 Practice Finals

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Answer Key for Practice Final #1 is on page 12 Answer Key for Practice Final #2 is on page 27 Answer Key for Practice Final #3 is on page 43 Practice Final #1 1. Under current federal income tax law, what is the shortest cost recovery period available to investors purchasing commercial rental property (excluding any personal property)? a. 15 years. b. 19 years. c. 31½ years. d. 39 years. e. None of the above. 2. The reasonable, probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value is defined as what type of analysis? a. supply and demand b. highest and best use c. most probable use d. pro-forma e. highest returning use 3. The final price for each comparable property reached after all adjustments have been made is termed the: a. Final estimate of value. b. Final adjusted sale price. c. Market value. d. Weighted price. 4. If an investor is in the 32 percent income tax bracket, how much will a tax credit of $2,000 save the investor in taxes? a. $2,000. b. $640. 1

c. $1,360. d. None of the above. 5. Conforming conventional loans are loans that: a. Are eligible for FHA insurance. b. Are eligible for VA guarantee. c. Are eligible for purchase by Fannie Mae and Freddie Mac. d. Meet federal Truth-in-Lending standards. 6. If a landowner purchased a vacant lot six years ago for $25,000, assuming no income or holding costs during the interim period, what price would the landowner need to receive today to yield a 10 percent annual return on the land investment? a. $40,262.75. b. $41,132.72. c. $44,289.03. d. $64,843.56. 7. Assume a retail shopping center can be purchased for $5.5 million. The center’s first year NOI is expected to be $489,500. A $4,000,000 loan has been requested. The loan carries a 9.25% fixed contract rate, amortized monthly over 25 years with a 7-year term. What will be the property’s (annual) debt coverage ratio in the first year of operations? a. 1.40. b. 1.19. c. 0.84. d. 0.08. 8. A characteristic of a partially amortized loan is: a. No loan balance exists at the end of the loan term. b. A balloon payment is required at the end of the loan term. c. All have adjustable interest rates. d. All have a loan term of 15 years. e. None of the above. 9. On a level-payment loan with 12 years (144 payments) remaining, at an interest rate of 9 percent, and with a payment of $1,000, the current balance is: a. $144,000. 2

b. $100,000. c. $87,871. d. $76,137. 10. In 2020 you purchased a small office building for $450,000, which you financed with a $337,500 fixed-rate, 25-year mortgage. Upfront financing costs totaled $6,750. How much of this upfront financing expense could be written off against ordinary income in 2020? a. $6,750.00. b. $173.01. c. $270.00. d. $245.45. 11. One of the main differences between residential mortgage loans and permanent financing of commercial real estate lies in the allocation of liability in the case of default. In commercial real estate, a special-purpose entity is created that shields the actual borrower from personal liability. When a lender cannot lay claim to the personal assets of the defaulted borrower, this type of loan is commonly referred to as a: a. Non-recourse loan b. Mini-perm loan c. Partially amortizing loan d. Interest-only loan 12. A mortgage that is intended to enable older households to “liquify” the equity in their home is the: a. Graduated payment mortgage (GPM). b. Adjustable rate mortgage (ARM). c. Purchase-money mortgage (PMM). d. Reverse annuity mortgage (RAM). 13. The process of creating a market-defining story includes all of these questions except: a. What is the product? b. Who is the customer? c. Where is the customer? d. What is the price? 3

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e. What is the competition? 14. You sold a commercial property and received net sales proceeds of $1.5 million. Your adjusted basis was calculated at $550,000, and your Depreciation Recapture came out to $150,000. What was the taxable gain and the capital gain on the property? a. $1 million; $900,000 b. $950,000; $800,000 c. $750,000; $600,000 d. $900,000; $850,000 15. Which of the following is not a type of taxable income? a. Capital gain income b. Depreciation recapture income c. Net sales proceeds income d. Ordinary income 16. You took out a mortgage loan with a term of 30 years and an initial balance of $2 million. The upfront financing costs you had to pay came out to 1% of this loan amount. How much can you deduct from your taxable income this year, given these upfront financing costs (rounded up to the nearest dollar)? a. $667 b. $670 c. $690 d. $700 17. You manage a residential income property and are looking to use depreciation write-offs to reduce your taxable income. What is the annual depreciation rate you’re allowed to use? a. 3.74% b. 3.8% c. 3.64% d. 3.61% 18. The market in which required rates of return on available investment opportunities are determined is referred to as the: a. Property market. 4

b. User market. c. Housing market. d. Capital market. 19. Externalities in land use include all except: a. Leap-frog development. b. Increased storm runoff from paving. c. Traffic congestion. d. Inability to judge the quality of a structure, once built. e. Noise created by land use. 20. How much would you pay today to receive $50 in one year and $60 in the second year if you can earn 15 percent interest on alternative investments of similar risk? a. $88.85. b. $89.41. c. $98.43. d. $107.91. e. $110.00. 21. You are a borrower deciding whether to refinance your mortgage loan. Your outstanding loan amount is $200,000. The cost of refinancing would be 5% of the loan amount. Assume your monthly interest payment savings, after you refinance, is $500. How long would it take for these interest savings to exceed your cost of refinancing? a. 20 months b. 21 months c. 18 months d. 22 months e. 25 months 22. Which of the following is not a part of the market-defining story in the real estate market research process? a. where is the customer b. what is the competition c. what does the customer care about d. what is the product e. what is the relevant data 5

23. If an investor is a “dealer” with respect to certain real estate, that real estate is classified (by the IRS) as being held: a. As a personal residence. b. For sale to others. c. For use in trade or business. d. As an investment. e. None of the above. 24. For tax purposes, a substantial real property improvement (CAPX) made after the initial purchase of a property is: a. Treated like a separate building. b. Added to the adjusted basis. c. Depreciated like personal property. d. Amortized over five years. 25. What are the two types of properties that both cannot be depreciated for tax purposes? a. Dealer properties and investment properties b. Personal residence and trade/business properties c. Personal residence and dealer properties d. Dealer properties and trade/business properties 26. Assume it cost you $2 million to acquire a commercial office building as an investor. The value of the land itself was estimated at $300,000, and the building contained $150,000 worth of personal property? What is the depreciable basis of the real property? a. $1.55 million b. $1.7 million c. $1.85 million d. $1.75 million 27. Among the following four categories, which is the largest asset category in the portfolio of the average U.S. household? a. Housing. b. Stocks. 6

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c. Deposits and money market funds. d. Government and corporate bonds. 28. Property taxes are a major source of revenue for: a. The federal government. b. School districts. c. Local governments. d. State governments. e. Both local governments and school districts. 29. As the level of perceived risk increases, a. Values and expected returns increase. b. Values and expected returns decrease. c. Values increase and expected returns decrease. d. Values decrease and expected returns increase. e. Values decrease but expected returns are unaffected. 30. The operating expense ratio: a. Highlights the relationship between net operating income and operating expenses. b. Shows the percentage of potential gross income consumed by operating expenses. c. Expresses operating expenses as a percent of effective gross income. d. Should reflect the cost of mortgage financing. 31. Assume a retail shopping center can be purchased for $6 million. The center’s first year NOI is expected to be $625,000. The monthly payment on the mortgage loan for this property is $11,000. The loan carries a 10% fixed contract rate, amortized monthly over 30 years. What will be the property’s (annual) debt yield ratio in the first year of operations? a. 0.513. b. 0.499. c. 0.842. d. 0.08. 32. If a mortgage is to mature (i.e., become due) at a certain future time without any reduction in the original principal balance, this is called: a. A second mortgage. b. An amortized mortgage. c. A limited reduction mortgage. 7

d. An interest-only mortgage. 33. Adjustable rate mortgages commonly have all the following except: a. A teaser rate. b. A margin. c. An index. d. A periodic interest rate cap. e. An inflation index. 34. Say you are an investor considering whether to put your money in either an ordinary annuity or an annuity due. The ordinary annuity will make payments at the ___ of each year. The annuity due will make payments at the __ of each year a. start; end b. end; start c. start; halfway point d. end; halfway point 35. I rent out an apartment and will pay $333.33 a month ($4,000/Yr.) for 30 yrs. You are a lender who expects a 10% annual return. What is the maximum amount that you would loan me today? a. $35,937.04 b. $38,711.29 c. $36,583.19 d. $37,983.23 36. As the interest portion of an amortization loan ___, the principal portion of the payment ___ a. decreases, decreases b. decreases, increases c. increases, increases d. increases, decreases 37. Which of the following mortgage types generally will have the most default risk, assuming the initial loan-to-value ratio, contract interest rate, and all other loan terms are identical? 8

a. Interest-only loans. b. Fully amortizing loans. c. Partially amortized loans. d. There is no difference in the default risk of these loans. 38. To reflect a change in market conditions between the date on which a comparable property sold and the date of appraisal of a subject property, an adjustment must be made for which of the following? a. Conditions of sale. b. Market conditions. c. Location. d. Financing terms. e. None of the above 39. For commercial mortgage loans, which of the following is not a common restriction on prepayment? a. Defeasance b. yield maintenance penalty c. lock-out period d. prepayment insurance 40. Say you are a developer trying to assess demand for your upcoming housing complex in Lewisburg. There are 1,500 owner occupied households in the town, and you want to target households composed of married couples–of which there are 450. More specifically, you want the married couples in the top 30% of the town’s income distribution–of which there are 150. What is your market share? a. 0.3 b. 0.15 c. 0.1 d. 0.2 41. Say you’re a developer selling houses in Lewisburg. You see that there is expected to be 250 total sales of houses during next year. Assuming your market share of 10% and an expected capture rate of 20%, how many houses do you expect to sell next year? a. 10 9

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b. 7 c. 4 d. 5 42. Differences in preferences or needs among market subgroups is known as a. Market fragmentation b. Market segmentation c. Market partitions d. Market splintering 43. Assume a city has 70 million square feet of available office space, and the vacancy rate is 5%. How much office space is needed in the city? a. 66.5 million sq ft b. 66 million sq ft c. 70 million sq ft d. 67.5 million sq ft 44. What is not one of the reasons investment value can differ from market value for a property? a. Differing expectations for rent price growth, vacancies b. Differing regulations for investors c. Differences in required returns among investors d. Differing discount rates between investors 45. After selling your commercial office building investment, you generate net sales proceeds of $1.75 million. The remaining mortgage balance you have to pay off is $200,000. In addition, you find that you have to pay $350,000 in taxes from the sale of the property. What is your after tax equity reversion? a. $1.25 million b. $1.5 million c. $1.55 million d. $1.2 million 10

46. From a tax standpoint, how are operating expenditures (OPEX) and capital expenditures (CAPEX) treated differently? a. OPEX are fully deductible in the year in which they are made, while capital expenditures are not deductible at all b. OPEX are fully deductible in the year in which they are made, while capital expenditures are deducted over multiple years c. OPEX are deducted over multiple years while capital expenditures are fully deductible in the year in which they are made d. OPEX are not deductible at all, while capital expenditures are deducted over multiple years 47. The overall capitalization rate calculated on a potential acquisition: a. Is the reciprocal of the net income multiplier. b. Explicitly incorporates the effects of expected future rent growth. c. Consider the risk associated with an investment opportunity. d. All of the above are true 48. The dominant loan type originated by most financial institutions is the: a. Fixed-payment, fully amortized mortgage. b. Adjustable rate mortgage. c. Purchase-money mortgage. d. FHA-insured mortgage. 49. Which of these ratios is an indicator of the financial risk for an income property? a. Debt coverage ratio. b. Loan-to-value ratio. c. Equity dividend rate. d. Both a and b, but not c. e. All three, a, b, and c. 50. Causes of real estate cycles include: a. Business cycles. b. Long real estate “gestation” periods. c. Weather cycles. d. Both a and b, but not c. e. All three: a, b, and c. 11

Answer Key for Practice Test 1 Calculations for Practice Test #1 Calculator Keystrokes for #6: Set payment schedule to 1 (press 1, then f PMT) N = 6, I = 10, PV = 25000, PMT = 0 → solve for FV Calculations for # 7 N = 300, I = 0.8, PV = 4 million, FV = 0 → solve for PMT Multiply the monthly PMT by 12 to get the annual PMT Divide NOI by Annual PMT to get the Debt Coverage ratio 12

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Calculator Keystrokes for #9 N = 144, I = 9/12, PMT = -1000, FV = 0 → solve for PV PV = 87,871.09 Calculator Keystrokes for #20 C0 = 0, C1 = 50, C2 = 60, I = 15 -> solve for NPV Calculations for #21: Cost to refinance = 0.05(200,000) = 10,000 Payback Period = 10,000/500 = 20 months Calculation for #31 Loan amount in year 1: PMT = $11,000, FV = 0, I = 10/12, n = 30(12), Solve for PV PV = $1,253,459 - Debt yield ratio: 625000/1,253,459 = 0.499 Calculator Keystrokes for #35: N = 360, I = 10/12, PMT = 333.33, FV = 0 → solve for PV Calculation for #41: Market segment potential = 250 Projected total market sales at 10% = 250(0.1) = 25 Projected sales at capture rate of 20% = 0.2(25) = 5 houses sold Calculation for #43: 0.05(70 mil) = 3.5 million sq ft is vacant 70 - 3.5 = 66.5 million square feet is needed Calculation for #45 13

After tax equity reversion = net sales proceeds - remaining mortgage balance - taxes due on sale Practice Test #2 1. Which of the following factors do not determine the amount of tax depreciation a real estate investor can use a. Cost recovery period b. Method of depreciation c. Original depreciable basis d. Tax credits 2. Depreciation __ a real estate investor’s taxable cash flow a. Raises b. Reduces c. Does not affect d. None of the above 3. You purchased an office building for $5.5 million a few years ago. In the years after the purchase, you incurred capital expenditures of $500,000. In addition, the accumulated depreciation of the property came out to $250,000 in the years after the purchase. What is the book value (the adjusted basis) of the property? a. $6 million b. $5.25 million c. $5.5 million d. $5.75 million 4. The mechanism by which the government partially recovers the depreciation tax benefit given to a property investor when the investor has sold an asset that has appreciated in value is known as the __ a. Depreciation adjustment b. Depreciation deferral c. Depreciation reduction tax d. Depreciation recapture tax 14

5. You’re a property investor trying to find your tax liability in the past year. You’re given the following information below. What is your tax liability? NOI $3.25 million CAPEX $100,000 Depreciation $24,000 Interest Expense $65,000 Amortized Financing Costs $3,000 Ordinary tax rate 26% a. $847,080 b. $850,100 c. $977,400 d. $822,350 6. When sellers of commercial properties receive the full sale price in cash at closing (minus any outstanding mortgage balance), the sale is treated as a __ a. partially taxable sale b. fully taxable sale c. non-taxable sale d. Depreciable sale 7. You are a property investor looking to find your return on investment from selling your office building. The original cost basis of the property was estimated at $1.15 million. In the years after the purchase, you incurred $350,000 of CAPEX. In addition, you had to pay the government a depreciation recapture tax of $55,000 upon selling the building. What is your adjusted basis? a. $1.5 million b. $1,095,000 c. $1,445,000 d. $1,350,000 15

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8. Section 1031 of Internal Revenue Code allows owners of Real Estate, under certain conditions, to exchange property for other property & avoid paying taxes at the time of transaction. What is the name of the this kind of exchange a. Transferable property exchange b. Like-kind exchange c. Comparable property exchange d. Similar use exchange 9. You’re a property investor looking to calculate your taxes due on sale from the apartment building you sold this year. You’re presented with the following information below in the table. What are your taxes due on sale? Taxable Gain $2.25 million Accumulated Depreciation $450,000 Capital Gain $1.8 million Capital Gains tax rate 15% Depreciation Recapture tax rate 25% a. $270,000 b. $112,500 c. $157,500 d. $382,500 10. What is a way in which a real estate investor can qualify for a tax credit? a. Rehabilitating an old/historic structure b. Constructing & rehabilitating qualified low-income housing units c. a and b, but not d d. Constructing multifamily apartment complexes in major metropolitan areas 11. Which of the following is a tax advantage of owning a home? a. Mortgage interest payments are tax deductible b. Property tax payments are tax deductible when paying federal taxes c. Exclusion of capital gains tax upon the sale of your home d. Fully deductible discount points when paid at origination 16

e. All of the above 12. With a mezzanine loan: a. the mezzanine lender has a lien on the property that is subordinate to the senior lien holder’s position. b. the borrower pledges the same property as collateral for the mezzanine loan that was pledged as collateral for the first mortgage. c. the borrower’s promise to pay is secured by the equity interest in the borrower’s limited partnership or limited liability company. d. the mezzanine lender has a more difficult time foreclosing than would be the case with a second mortgage 13. The cycle of real estate market research starts with: a. Creating a market-defining story. b. Assessing the national market. c. Collecting market data. d. Posing preliminary conclusions. e. Testing the current market condition. 14. Which of the following is not included in accrued depreciation when applying the cost approach to valuation? a. Physical obsolescence. b. Functional obsolescence. c. External obsolescence. d. Tax depreciation. 15. You’re an appraiser using the cost approach to value a school building, which is estimated to cost $200,000 to construct. The physical deterioration of the school is $30,000 and the external obsolescence is valued at $5,000. The value of the land itself is projected to be $50,000. What is the market value of the building? 250000-35000 a. $220,000 b. $215,000 c. $210,000 d. $205,000 17

16. You're an appraiser trying to determine the value of a home. A comparable property sold 9 months ago for $620,000. In the past 9 months, home values in the neighborhood have fallen by 0.1% per month. What is the adjusted price of the comparable property? a. $622,330 b. $631,250 c. $614,420 d. $617,340 17. You're an appraiser trying to find the value of a subject property. The main difference between the comparable property and the subject property is that the comparable has an in-ground pool while the subject does not. Which kind of adjustment should take place? a. The subject property price should be adjusted upwards b. The subject property price should be adjusted downwards c. The comparable property price should be adjusted upwards d. The comparable property price should be adjusted downwards 18. Appraisers using the sales comparison approach make adjustments to comparable property prices. These adjustments are divided into two groups: transactional adjustment and property adjustments. Which of the following is a property adjustment? a. Location b. Market conditions c. Conditions of sale d. Financing terms 19. Assume you’ve taken out a balloon mortgage as a commercial real estate investor. The initial loan balance was $1.5 million, the loan term is 10 years, and the contract interest rate is 5%. However, payments were calculated on a 30 year amortization schedule. What is the balloon payment in year 10? a. $8,052.3 b. $1,225,223 c. $1,220,127 d. $1,196,455 20. Assuming all else equal, the __ of an annuity due will be __ that of an ordinary annuity 18

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a. Present value; less than b. Future value; greater than c. Present value; equal to d. Future value; less than 21. To encourage borrowers to accept ARMs rather than level payment mortgages, lenders offer an initial short term introductory rate that is less than the prevailing rate on level payment mortgages. This rate is known as a __ a. Teaser rate b. Index rate c. Discount rate d. Margin rate 22. When considering the discount rate of expected future cash flows for a certain investment, the investor considers the rate of return they’re forgoing on an alternative investment of equal risk. In this context, the discount rate can be thought of as the __ a. Future value b. Net present value c. Internal rate of return d. opportunity cost 23. Given a certain loan term, a monthly payment, and a contract interest rate, the maximum amount of money a lender will be willing to provide to the borrower is known as the __ a. Future Value of the loan b. Present Value of the loan c. Internal Rate of Return of the loan d. Opportunity cost of the loan 24. Assume a property generated a first-year NOI of $835,000. It’s operating expense ratio was 25%, its equity dividend rate was 33%, and its capitalization rate was 8%. Given these facts, what was the acquisition price of the property? a. $10,437,500 b. $3,340,000 c. $2,530,303 d. $6,764,301 19

25. Given the information in the table, find the capitalization rate of the apartment complex Number of units 25 Monthly rent per unit $2,000 Vacancy and collection losses 7% of PGI OPEX 6% of EGI CAPEX 2% of EGI Acquisition price of the property $2,275,000 a. 21.34% b. 22.21% c. 22.57% d. 23.11% 26. Which of the following statements is false? a. Tax losses on active income can be used to offset positive portfolio income. b. Tax losses on portfolio income can be used to offset positive active income. c. A loss on the sale of a real estate stock can be used to offset a positive gain on the sale of a corporate bond. d. Net passive activity losses can be used to offset dividend income from a real estate stock. 27. Which of the following best describes the taxation of gain and losses from the sale of Section 1231 assets? a. Net Section 1231 gains and net losses are taxed as ordinary income. b. Net Section 1231 gains and net losses are taxed as capital gain income. c. Net Section 1231 gains are taxed as ordinary income; net losses are taxed as capital gains. d. Net Section 1231 gains are taxed as capital gains; net losses are taxed as ordinary income. 20

28. When a property is sold for less than its adjusted tax basis, its depreciation (wear and tear) was: a. Estimated correctly. b. Underestimated. c. Overestimated. d. Determined by the owner. 29. Taxable income from the rental of actively managed depreciable real estate is classified as: a. Active income. b. Passive income. c. Portfolio income. d. Passive income if taxable income is negative; active income if taxable income is positive. 30. A jumbo loan is: a. A conventional loan that is large enough to be purchased by Fannie Mae or Freddie Mac. b. A conventional loan that is too large to be purchased by Fannie Mae or Freddie Mac. c. A multi property loan. d. A VA loan that exceeds the normal limits. 31. Home equity loans typically: a. Are fixed-rate, fixed-term loans. b. Are first mortgage loans. c. Are originated by mortgage bankers. d. Have tax-deductible interest charges. 32. You’re a lender evaluating two loans to give to a borrower. Both loans have the same contract interest rate and amortization schedule. However, the first loan has a shorter term to maturity than the second loan. Given these facts, the second loan has greater __ risk a. Interest rate b. Default c. Reinvestment d. Prepayment 21

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33. The acquisition price of a property is $380,000. The loan amount is $285,000. If the property’s NOI is expected to be $22,560, operating expenses $12,250, and the annual debt service $19,987, the debt yield ratio ( DYR ) is approximately equal to: a. 0.059 or 5.9%. b. 0.079 or 7.9%. c. 0.0701 or 7.0%. d. 0.0526 or 5.3%. e. None of the above. 34. Using financial leverage on a real estate investment can be for the purpose of all of the following except: a. Greater diversification. b. Greater expected return on equity. c. Being able to acquire the property. d. Reduction of financial risk for the leveraged investment. 35. A strong assertion about the large amount of data seemingly available for real estate market research is that most of it is: a. Inaccurate. b. Too costly. c. Irrelevant to a given analysis. d. Too detailed. e. Too old. 36. The approach to real estate market research advocated in chapter 6 starts with the: a. National economy. b. Local economy. c. Relevant industry market. d. Region. e. Nature of the property. 37. For real estate market research, which of the following data sources can you use? a. Detailed data of the U.S. decennial census. b. Data from County Business Patterns (U.S. Bureau of the Census). c. National apartment vacancy rates from the U.S. Current Population Survey. d. All of the above 22

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38. In the sales comparison approach, the value obtained after reconciliation of the final adjusted sale prices from the comparable sales is termed the: a. Adjusted price. b. Final adjusted sale price. c. Market value. d. Indicated opinion of value. 39. A property comparable to the single-family home you are appraising sold three months ago for $450,700. You have determined that the adjustments required for differences in the comparable and subject property are as follows: Making the adjustments in the right order, what is the final adjusted sale price of the comparable (rounded to the nearest dollar)? a. $455,605. b. $445,604. c. $432,286. d. $455,638. e. None of the above is within $10 of the correct answer. 40. You are a borrower taking out an FHA insured loan. The appraised value of the home you are buying is $400,000. The FHA insured loan allows for an LTV of 96.5%. 23

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The Upfront Mortgage insurance premium you have to pay is 1.75% of the loan amount. What is the total loan amount you receive? a. $396,800 b. $397,750 c. $392,755 d. $391,855 e. $393,675 41. Assume that for this same FHA insured loan in question #40, your contract interest rate is 5.5% and the loan term is 30 years. What is your monthly payment? a. $2250 b. $2230 c. $2275 d. $2195 e. $2245 42. How does the use of leverage increase the borrower’s return on a property investment? a. the unlevered IRR exceeds the cost of borrowing b. the levered IRR exceeds the unlevered IRR c. the cost of borrowing exceeds the cost of equity d. the LTV of the loan is below 80% 43. Which of the following are transactional adjustments made by appraisers? a. Financing arrangements b. property rights conveyed c. expenditures made after purchase d. market conditions e. all of the above 44. You’re a borrower deciding whether to refinance your existing mortgage, which has an outstanding balance of $300,000, a term of 30 years, and an interest rate of 7%. The cost of refinancing will be 2% of the loan amount. Your refinanced loan will be the same with the exception that your interest rate will be reduced to 3%. What is the approximate net benefit you will generate a year after you refinance? a. 2,344 24

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b. 2,723 c. 2,653 d. 2,734 1995.9 1264.8 1995.9-1264.8 = 731.1 monthly savings 731.1*12 = 45. A market where tenants negotiate rent and other terms with property owners or their managers is referred to as a: a. Property market. b. User market. c. Housing market. d. Capital market. 46. Real estate markets differ from other asset classes by having all of the following characteristics except: a. Local market. b. High transaction costs. c. Segmented market. d. Homogeneous product. 47. Which of the following is not important to the location of most commercial properties? a. Access to customers. b. Visibility. c. Access to schools. d. Availability of communications infrastructure. 48. Which of the following is not a form of property right? a. Lien. b. Easement. c. Leasehold. d. License. e. Mineral rights. 49. Which of these is a titled estate? a. Fee simple absolute. 25

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b. Fee simple conditional. c. Conventional life estate. d. Legal life estate. e. All of these. 50. Which of these liens has the highest priority? a. First mortgage lien. b. Mechanics’ lien. c. Property tax lien. d. Second mortgage lien. e. Unable to say because it depends strictly on which was created first. Practice Final 2 Answer Key 26

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Practice Final 2 Calculations Calculations for #3 Book value = purchase price + CAPEX - accumulated depreciation Book value = $5.5 million + $0.5 million - $0.25 million = $5.75 million Calculations for #5 27

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Taxable income = NOI + CAPEX - Depreciation - Interest Expense - amortized financing costs Taxable income = $3.25 million - $100,000 - $24,000 - $65,000 - $3000 = $977,400 Tax liability = taxable income(ordinary tax rate) Tax liability = $977,400(26%) = $847,080 Calculations for # 9 Taxes due on sale = capital gains tax payment + depreciation recapture tax payment Capital gains tax payment = capital gain(capital gains tax rate) Capital gains tax payment = ($1.8 million)(15%) = $270,000 Depreciation recapture tax payment = Accumulated Depreciation(Depreciation Recapture tax rate) Depreciation recapture tax payment = ($450,000)*(25%) = $112,500 Taxes due on sale = $270,000 + $112,500 = $382,500 Calculation for #15: 200,000 - 30,000 - 5,000 = 165,000 165,000 + 50,000 = 215,000 Calculation for #16 9(-0.001) = -0.009 Adjusted price of comparable = (1 - 0.009)(620000) = $614,420 Calculation for #19 First, find the monthly payment PV = $1,500,000, FV = $0, I = 5/12, N = 30*12 → solve for PMT PMT = $8,052.3 28

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Now, use the monthly payment to get the remaining balance in year ten. Note that 20 years of payments are still left FV = $0, I = 5/12, N = 20*12, PMT = $8,052.3 → solve for PV PV = $1,220,127 Explanation for #20 The future value of an annuity due is greater than an ordinary annuity, given that the payments are received earlier on an annuity due Calculation for #24 Acquisition price = NOI/cap rate Acquisition price = 835,000/0.08 = $10,437,500 Calculation for #25 First, find annual PGI Monthly PGI = 25(2000) = 50,000 Annual PGI = (50,000)(12) = $600,000 Next, find VCL and use it to get EGI VCL = (7%)(600,000) = $42,000 EGI = PGI - VCL EGI = 600,000 - 42,000 = $558,000 Then, find OPEX and CAPEX OPEX = (6%)(558,000) = $33,480 CAPEX = (2%)(558,000) = $11,160 Now, find NOI NOI = EGI - OPEX - CAPEX NOI = $558,000 - $33,480 - $11,160 = $513,360 29

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Divide NOI by acquisition price to get the cap rate Cap rate = 513,360/2,275,000 = 22.57% Explanation for #28 Accumulated Depreciation is subtracted in the equation to find the adjusted basis. So when depreciation is underestimated, the adjusted basis will be higher (all else equal) Calculation for #33: 22560/285000 = 7.9% Calculation for #39: Expenditures after purchase: 450700 + 3000 = 453700 Market conditions: 453700(1 + 0.005(3)) = 460505.5 Location: 460505.5(1 + 0.03) = 474320.665 Physical characteristics: 474320.665(1 - 0.05) = 450604.63 Non Realty items: 450604.63 - 5000 = 445604.63 Calculations for #40: Loan amount = 400,000(0.965) = $386,000 Upfront Mortgage insurance premium = (386,000)(0.0175) = $6,755 Total loan amount = 386,000 + 6,755 = $392,755 The upfront mortgage insurance premium is always 1.75% of your loan amount The total loan amount you receive includes this upfront premium Calculations for #41: N = 30*12, I = 5.5/12, PV = 392,755, FV = 0 → solve for PMT PMT = $2,230 30

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Calculations for #44: First compare the monthly payments and calculate monthly interest savings Old mortgage: N = 360, I = 7/12, PV = 300,000, FV = 0 → solve for PMT PMT = 1996 New mortgage: N = 360, I = 3/12, PV = 300,000, FV = 0 → solve for PMT PMT = 1265 Interest savings (monthly) = 1996-1265 = 731 Interest savings after a year = 731(12) = 8,772 Cost to refinance = 0.05(300,000) = 6,000 Net benefit = 8772 - 6000 = 2772 Practice Final #3 1. While most real property in the U.S. is privately owned, govt regulations limit private property use and thus play a role in determining property values. Regulations that address the unintended and unaccounted consequences of one land user upon others are referred to as __ a. Externalities b. Urban sprawl c. Incomplete information d. Locational monopoly 2. You are a property investor looking to find your return on investment from selling your office building. The original cost basis of the property was estimated at $1.15 million. In the years after the purchase, you incurred $350,000 of CAPEX. In addition, you had to pay the government a depreciation recapture tax of $55,000 upon selling the building. What is your adjusted basis? a. $1.5 million b. $1,095,000 c. $1,445,000 d. $1,350,000 31

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3. A comparable property was sold 15 months ago for $105,000. If the appropriate adjustment for market conditions is +0.25% per month (no compounding), what would be the adjusted price of the comparable property? a. $144,375 b. $105,262.5 c. $105,393.8 d. $108,937.5 4. The mechanism by which the government partially recovers the depreciation tax benefit given to a property investor when the investor has sold an asset that has appreciated in value is known as the __ a. Depreciation adjustment b. Depreciation deferral c. Depreciation reduction tax d. Depreciation recapture tax 5. Given the following information on a 30-year fixed payment fully amortizing loan, find the remaining balance that the borrower has at the end of seven years; interest rate = 7%, monthly payment = $1200 a. $164,402 b. $79,509 c. $180,369 d. $17,143 6. Mortgages have multiple costs associated with them, so a borrower may attempt to reduce these costs into a single measure in order to compare two or more mortgages. Which of the following measures is a popular tool for comparing the cost of several mortgages a. Teaser rate b. Upfront fees c. Annual percentage rate d. Contracted interest rate 7. When sellers of commercial properties receive the full sale price in cash at closing (minus any outstanding mortgage balance), the sale is treated as a __ a. partially taxable sale 32

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b. fully taxable sale c. non-taxable sale d. Depreciable sale 8. Given the following information, calculate the debt coverage ratio for this investment. PGI = $120,000, Vacancy rate = 9%, NOI = $57,900; OPEX = $51,300, acquisition price = $520,000, debt service = $40,000 a. 0.69 b. 8.29 c. 2.73 d. 1.45 9. When a zoning ordinance is revised, some existing land uses then fall outside the new zoning classification. These land uses are referred to as __ a. Nonconforming uses b. Conforming uses c. Special uses d. Exclusionary uses 10. Given the following information on a fixed-rate fully amortizing loan, find the maximum amount that the lender will be willing to provide to the borrower: loan term = 30 years, monthly payment = $800, interest rate = 6% a. $133,433 b. $13,333 c. $9,295.15 d. $6,707 11. You’re a property investor trying to find your tax liability in the past year. You’re given the following information below. What is your tax liability? NOI $3.25 million CAPEX $100,000 Depreciation $24,000 33

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Interest Expense $65,000 Amortized Financing Costs $3,000 Ordinary tax rate 26% a. $847,080 b. $850,100 c. $977,400 d. $822,350 12. Assume it cost you $2 million to acquire a commercial office building as an investor. The value of the land itself was estimated at $300,000, and the building contained $150,000 worth of personal property? What is the depreciable basis of the real property? a. $1.55 million b. $1.7 million c. $1.85 million d. $1.75 million 13. An investor agreed to sell a warehouse 5 years from now to the tenant who currently rents the space. The tenant will continue to pay $20,000 in rent at the end of each year including year 5 in which he will purchase the building for an additional $150,000. Assuming a required return of 10%, how much is this deal currently worth to the investor? a. $363,678.5 b. $1,032,475.67 c. $168,953.93 d. $241,451.07 14. In order to better understand a borrower’s probability of default, lender have a number of tools at their disposal. The ratio that measures the percentage of the price (or value) of a property that is encumbered by the first mortgage is referred to as __ a. LTV ratio b. P/E ratio c. Break even ratio d. Debt coverage ratio 34

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15. The flexibility to prepay the principal on a mortgage loan differs significantly between commercial and residential mortgages. Which of the following clauses prohibits prepayment of the mortgage loan for a specified period of time after origination? a. Defeasance b. Curtailment c. Lockout provisions d. Yield maintenance agreements 16. Which of the following factors do not determine the amount of tax depreciation a real estate investor can use a. Cost recovery period b. Method of depreciation c. Original depreciable basis d. Tax credits 17. From a tax standpoint, how are operating expenditures (OPEX) and capital expenditures (CAPEX) treated differently? a. OPEX are fully deductible in the year in which they are made, while capital expenditures are not deductible at all b. OPEX are fully deductible in the year in which they are made, while capital expenditures are deducted over multiple yearsOkay c. OPEX are deducted over multiple years while capital expenditures are fully deductible in the year in which they are made d. OPEX are not deductible at all, while capital expenditures are deducted over multiple years 18. Estimating the market value of real estate is complicated by the unique characteristics of real estate markets. In contrast to stock markets, real estate markets are characterized by all of the following except a. The physical location of the asset being sold plays an important role in the pricing process b. Transactions occur infrequently c. No two assets are considered perfect substitutes for one another d. Market prices are revealed almost instantaneously to prospective buyers 19. Which of the following types of loans is the most common instrument used to finance the acquisition of existing commercial property? 35

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a. Construction loans b. Mezzanine loans c. Fixed rate balloon mortgage loans d. Floating rate mortgage loans 20. A new residential development will face competition from other new developments, other builders, and sales of existing homes. To find if demand in that market segment will be sufficient to justify proceeding with the project, a develop would be most interested in finding a __ a. Capitalization rate b. Risk premium c. Capture rate d. Risk free rare 21. Assuming an investor requires a 10% annual yield over the next 12 years, how much would she be willing to pay for the right to receive $20,000 at the end of year 12? a. $136,273 b. $62,768 c. $6,053 d. $6,372 22. Relative to residential loans, the underwriting process for commercial loans is more complicated. The commercial loan underwriting process focuses first on which of the following a. Individual borrower’s wages b. Individual borrower’s personal assets c. Income producing potential of the collateral property d. Individual borrower’s credit quality 23. For tax purposes, a substantial real property improvement (CAPX) made after the initial purchase of a property is: a. Treated like a separate building. b. Added to the adjusted basis. c. Depreciated like personal property. d. Amortized over five years. 36

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24. What are the two types of properties that both cannot be depreciated for tax purposes? a. Dealer properties and investment properties b. Personal residence and trade/business properties c. Personal residence and dealer properties d. Dealer properties and trade/business properties 25. When a property is sold for less than its adjusted tax basis, its depreciation (wear and tear) was: a. Estimated correctly. b. Underestimated. c. Overestimated. d. Determined by the owner. 26. Taxable income from the rental of actively managed depreciable real estate is classified as: a. Active income. b. Passive income. c. Portfolio income. d. Passive income if taxable income is negative; active income if taxable income is positive. 27. You have just had a tenant sign a lease contract that guarantees you payments of $100,000 at the end of each year for the next five years. If you wanna find the present value of these future cash flows, you would use which of the following time-value-of- money processes? a. Discounting b. Amortizing c. Compounding d. Aggregating 28. Property rights can be dismantled into lesser bundles, referred to as interests, which can then be held by different individuals. Interests in real property that include possessions are referred to as__ a. Estates b. Licenses 37

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c. Fixtures d. Townships 29. Especially in terms of retail properties, which of the following attributes is considered the most likely to result in drastic value differences between otherwise similar properties? a. Financing attributes b. Structural attributes c. Land attributes d. Location attributes 30. Given the following information, find the equity dividend rate for this investment: NOI = $18,750, Before-tax-cash-flow = $11,440, acquisition price = $520,000, equity investment = 20% — 520,000-18750x.20=100,250 then 11440/100,250 a. 11% b. 3.6% c. 18.02% d. 2.2% 31. After selling your commercial office building investment, you generate net sales proceeds of $1.75 million. The remaining mortgage balance you have to pay off is $200,000. In addition, you find that you have to pay $350,000 in taxes from the sale of the property. What is your after tax equity reversion? a. $1.25 million b. $1.5 million c. $1.55 million d. $1.2 million 32. In 2020 you purchased a small office building for $450,000, which you financed with a $337,500 fixed-rate, 25-year mortgage. Upfront financing costs totaled $6,750. How much of this upfront financing expense could be written off against ordinary income in 2020? (6750/25) a. $6,750.00. b. $173.01. c. $270.00. d. $245.45. 38

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33. Lenders generally require PMI for conventional loans over 80% of the value of the security property. PMI protects a lender against which of the following? a. Changes in the index rate associated with an ARM b. Stoppage of mortgage payment after the death of an insured borrower c. Losses due to default on the loan d. Legal threat to the lender’s mortgage claim 34. Which of the following tools of public land use control represents the earliest method of police power to regulate land use (Hint: standards for energy efficiency and sustainability are the most recent trends in the application of this land use control) a. Zoning b. Planned unit developments c. Subdivision regulation d. Building codes 35. Adjustments for physical characteristics are intended to capture the dimensions in which a comparable property differs physically from a subject property. If the only physical difference between the subject and comparable is that the comparable does not have a fireplace, which of the following adjustments should take place a. The transaction price of the comparable property should be adjusted upwards b. The transaction price of the comparable property should be adjusted downwards c. The transaction price of the subject property should be adjusted downwards d. The transaction price of the subject property should be adjusted upwards 36. How do mortgage interest and principal payments differ from a tax deduction standpoint? a. Mortgage interest is not deductible, while repayment of principal is deductible in the year it is paid b. Mortgage interest is generally deductible in the year it is paid, while repayment of loan principal is not c. There are no differences between them d. None of the above 37. If a mortgage loan is prepaid before the up-front costs are fully deducted, the remaining costs can be deducted __ a. One year after sale b. Two years after sale 39

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c. in the year of the sale d. Never 38. A property's original cost basis was estimated at $775,000, and the value of the land itself was estimated at $220,000. What is the original depreciable basis of the land? a. $995,000 b. $775,000 c. $220,000 d. $555,000 39. Commercial properties have a cost recovery period of 39 years. Given this fact, what is the straight line depreciation rate for a commercial property? a. 3.64% b. 2.56% c. 3.91% d. 2.22% 40. Personal property is depreciated on an ___ basis, while real property is depreciated on a __ basis. a. Straight line; accelerated b. Accelerated; straight line c. Tax adjusted; accelerated d. They are adjusted on the same basis 41. Say you own a commercial property with a cost recovery period of 39 years. 5 years down the line, you incur capital expenditures of $40,000. How much of this capital expenditures can you depreciate per year? 40000/39 a. $1,263 b. $1,073 c. $1,025 d. $1,090 42. When calculating your after tax equity reversion and the IRR that results, the After- tax discount rate is __ than your before-tax discount rate a. Less b. Greater 40

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c. Equal to d. None of the above 43. You’re deciding whether to refinance your home mortgage loan. Your lender tells you that the cost of refinancing will be $4300 in total. Your original monthly mortgage payment was $1250, and your monthly payment after refinancing would be $1150. What is the payback period a. 43 months b. 4 months c. 3 months d. 158 months 44. Given the following information, find the capitalization rate for the apartment complex: 15 apartments, market rent (per month) = $1,000, vacancy and collection losses = 10% of PGI, OPEX = 5% of EGI, CAPEX = 10% of EGI, acquisition price = $1,710,000 a. 9.5% b. 10.5% c. 8.1% d. 9% 45. In making single-asset real estate investment decisions, the first pass often involves calculating a series of returns, ratios, and multipliers. Which of the following is often cited as a limitation associated with this type of analysis? a. They are complex to understand b. They are rarely used by industry professionals c. They are difficult to calculate d. They fail to incorporate cash flows beyond the first year of analysis 46. A common criticism of the APR is that it usually understates the true cost of borrowing. The APR may understate the true cost of borrowing because it assumes a. The loan always goes to maturity b. Upfront fees should be ignored c. Interest rates will always rise d. The actual life of the loan is shorter than maturity 47. How are C-corporations and pass-through entities (LLCs and LPs) taxed differently? 41

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a. C-corporations are subject to triple taxation, while pass-through entities are subject to double taxation b. C-corporations are subject to double taxation, while taxes flow through for pass- through entities c. There are not taxed differently d. C-corporations are taxed at long term capital gains rates, while pass-through entities are taxed at short term capital gains rates 48. What are two common tax deductions for homeowners? a. Capital gains deduction; mortgage interest deduction b. The standard deduction; mortgage interest deduction c. Capital gains deduction; the standard deduction d. Homeowners cant receive tax deductions 49. Subtracting the adjusted basis from the net sales proceeds get you the __ a. Depreciation recapture b. Capital gains c. Total gain (loss) d. Depreciated gains 50. What are two things that cause a property’s sales price to exceed its book value? a. Remaining mortgage balance; accumulated depreciation b. Accumulated depreciation; financing costs c. Accumulated depreciation; price appreciation d. Price appreciation; remaining mortgage balance Practice Final #3 Answer Key 42

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Formula Sheet for the Final 1.) Present Value of a Lump Sum ● You’re given FV, N, I, and PMT (the PMT is zero in this case) ● Enter these four values into the financial calculator, and then find the PV 2.) Present Value of an Annuity ● You’re given N, I, PMT, and FV (the FV is zero) ● Enter these four values into the financial calculator, and then find the PV 3.) Find the PV of constant cash flows ● You’re given N, I, PMT, and FV ● PMT is the annual net income you receive, and FV is the cash flow you receive from selling the property ● Enter these four values into the financial calculator, and then find the PV 4.) Find the PV of uneven cash flows ● You’re given I and a stream of uneven cash flows for multiple years ● C 0 = 0 ● Enter cash flows for C 1 , C 2 , …, C n ○ The cash flow for the last year may include the proceeds from selling the property ● Once the cash flows and I are all entered, solve for NPV 5.) Finding the IRR on an annuity ● You’re given N, PV, PMT, and FV (the FV is zero) ● Enter these four values into the financial calculator, and then find I 6.) Finding the IRR from uneven cash flows ● You’re given a stream of uneven cash flows for multiple years ● C 0 = the cash outflow from paying for the property (should be a negative value) ● Enter cash flows for C 1 , C 2 , …, C n ○ The cash flow for the last year may include the proceeds from selling the property ● Solve for IRR once the cash flows are all entered 44

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7.) Finding the NOI from a property investment ● First, find the annual PGI ○ PGI = (the number of rental units)(monthly rent per unit)(12) ● Next, find the EGI ○ EGI = PGI - VCL ○ VCL may be stated as a percentage of PGI. In this case, find the VCL in dollar terms, and then subtract it from PGI ● Then, find OPEX and CAPEX ○ OPEX and CAPEX may be stated as a percentage of EGI. In this case, find the OPEX and CAPEX in dollar terms, and then subtract them from EGI ● Now, find NOI ○ NOI = EGI - OPEX - CAPEX Single Year Investment Criteria 45

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8.) Find the PV of future loan payments ● This value, from the perspective of a lender, is how much money you should lend to a borrower ● You’re given N, I, PMT, and FV (the FV is zero) ● Enter these four values into the financial calculator, and then find the PV 9.) Find the monthly required payment on a loan ● You’re given N, I, PV, and FV (the FV is zero) ● Enter these four values into the financial calculator, and then find the PMT 10.) Find the remaining balance on a loan ● You’re given N, I, PMT, and FV (the FV is zero) ○ In this case, N is the number of years remaining on the loan ● Enter these four values into the financial calculator, and then find the PV 11.) Find the lender’s yield ● First, find the PV of the loan amount ● You’re given N, I, PMT, and FV (the FV is zero) ● Enter these four values into the financial calculator, and then find the PV ● Subtract the PV of the loan by the dollar amount of discount points that are paid on the loan ● Now, use N, PMT, the adjusted PV, and FV to find I → this gives you the lender’s yield 12.) Find the Effective Borrowing Cost ● First, find the PV of the loan amount ● You’re given N, I, PMT, and FV (the FV is zero) ● Enter these four values into the financial calculator, and then find the PV ● Subtract the PV of the loan by the dollar amount of closing costs that are paid on the loan ○ The closing costs usually includes discount points paid on the loan, as well as other closing costs not paid to the lender ● Now, use N, PMT, the adjusted PV, and FV to find I → this gives you the effective borrowing cost 13.) ARM calculations 46

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● First, find the monthly payment in year 1 ● You’re given N, I, PV, and FV (the FV is zero) ○ In this case, I is the teaser rate ● Enter these four values into the financial calculator, and then find the PMT ● Next, find the remaining loan balance after 1 year ● You’re given N, I, PMT, and FV (the FV is zero) ○ Use the monthly payment you just found ○ N is the number of months remaining on the loan ● Solve for PV to get the remaining balance ● For the next year, use the new interest rate to get the new PMT, and make sure your PV is the remaining loan balance at the end of the last year 14.) Calculate the balloon payment on the commercial mortgage loan ● First, find the monthly payment in year 1 ● You’re given N, I, PV, and FV (the FV is zero) → solve for PMT ● Next, find the remaining balance (the balloon payment) you will have to pay after a certain number of years ● You’re given N, I, PMT, and FV (the FV is zero) → solve for PV ○ In this case, N is (amortization term - the loan term) 15.) Find the payback period from refinancing a mortgage ● Find the monthly payment savings from refinancing the loan (old loan payment - new loan payment) ● Divide the the cost of refinancing by the monthly payment savings ● This gives you the payback period 16.) Find the monthly payment on a FHA loan ● You’re given N, I, PV, and FV (the FV is zero) → solve for PMT ● First however, you must add the upfront mortgage insurance premium (UFMIP) to the PV of the loan 47

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Tax and Cash Calculations ● Do the tax calculation before doing the cash calculation ● Your ordinary tax rate would probably be your marginal income tax rate 48

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ACFM 266 Practice Finals

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