REFI tenta

Question 1

• Motivations for investing in income properties

Answer 1

• Rate of return, To receive Net Income (NOI) before tax and financing
• Price appreciation, increase in value during the holding period increases the return
• Diversification, reduces the overall risk to hold many investment alternatives
• Tax benefits, due to interest rate and depreciation deduction (d) are tax deductible what reduces the Taxable income

Question 2

• Prime Yield

Answer 2

Represents the best (lowest) estimated to be achievable for office property in the best market and location. Defined as NOI at the date of purchase as a percentage of the selling price.

Question 3

• Characteristics of RE-Investments:

Answer 3

1. Rental income (from tenants)
2. Appreciation of property value
3. Financial Leverage (increase in expected return on equity if debt is used)
4. Control the direction of the investment
5. How risk is measured
6. Security ( Re as an inflation hedge)

Question 4

• Illiquidity

Answer 4

1. Buying and selling is costly and time consuming
2. Large size
3. Abscense of a single market
4. Uniqueness of every property
5. Legal Complexity

Question 5

Types of property

Answer 5

• Real estate: Refers to the physical land and improvements constructed on the land
• Real property: Refers to ownership rights associated with the physical land and improvements attached to the land.
• Personal property: Refers to ownership associated with personal property that includes tangible, intangible and movable.

Question 6

• Bundle of property rights: A fee simple represents the full bundle of rights.

Answer 6

• To divide it up into lesser estates and sell
• Lease out the property
• Borrow against property

Question 7

• Components of Mortgage interest rate

Answer 7

1. Default risk – that the borrower default of it’s payments/obligations to the mortgage provider
2. Interest rate risk – the risk of anticipated- and unanticipated inflation
3. Prepayment risk – that the lender will decide to pre pay the mortgage
4. Liquidity risk – the selling and buying of property is both costly and time consuming
5. Legislative risk – the risk that governments will change the laws that permit the lender to collect on a legitimate debt

Question 8

• CPM (Constant payment mortgage)

Answer 8

• A fixed payment on the original loan amount at a fixed interest rate. At the end of the mortgage period it is repaid. Amortization will differ year to year.

Question 9

• Market Rent factors

Answer 9

• Outlook for national economy
• Economic base of the area
• Demand & Supply

Question 10

• Types of lease Income

Answer 10

• Flat Rent: No rent changes.
• Indexed rents
• Step up Rents: Specified rent increases.
• Percentage lease: Based on their sales.

Question 11

• Pro Forma Cash Flow

Answer 11

Rental Income
+ Other income
+ Recoveries
-Vacancy & Collection Loss
-Concession
= Effective Gross Income

Effective Gross Income
-Operating expenses
-Capital Expenditures
= Net operating Income

Question 12

• Income approach

Answer 12

• GRM x rental Income
• DCF
• Direct capitalization

Question 13

• Comparable qualities

Answer 13

• Quality, construction, size, age, functionality, location and operating efficiency.

Question 14

Property Value

Answer 14

pv of Equity value + pv of Mortgage financing

Question 15

Equity Dividend

Equity Dividend Rate

Answer 15

NOI - Debt services (Equity Dividend = Before tax cash flow)

Equity Dividend/Initial equity Investment

Question 16

Debt coverage Ratio

Answer 16

NOI/DS

Question 17

• After Tax Cash Flow

Answer 17

1. NOI – Depreciation – interest = Taxable income
2. Taxable income * Tax rate
3. BTCF – Tax = ATCF

Question 18

What activities usually are included in the Tenants Underwriting Process

Answer 18

1. Analyses of tenant’s financial statements
2. Tenant’s credit ratings
3. Analyses report from tenant’s business markets
4. Bank relationship
5. Tenant’s existing obligations

Question 19

Three categories of depreciation

Answer 19

• Physical depreciation due to wear and tear,
• Functional or structural depreciation due to changes in layout designs, and technological
• External or economic depreciation due to changes outside of the property such as excessive traffic, noise or pollution. These different categories of depreciation will have an impact on rentals and or operation expenses.

Question 20

Why might the decision to own rather than lease have an unfavorable effect on the firm’s financial statement?

Answer 20

• Real estate may have a lower current return than the typical investment that a firm makes, thus ownership lowers the firm’s return on assets (ROA). Also, if RE is highly leveraged it makes the firm to look more risky

Question 21

Types of Risk

Answer 21

• Business Risk
  Loss in return due to fluctuations in the economic activity affecting the income produced by the property
• Financial Risk
  Magnifies the business risk due to debt structure of the financing
• Liquidity Risk
  when the conditions in the market with many buyers and sellers are NOT in place
• Inflation Risk
  the risk of unexpected inflation that reduces the rate of return
• Management Risk
  the risk based on the capability of management that reduces the rate of return

Question 22

What is the difference between covariance and correlation

Answer 22

Correlation is calculated by dividing the covariance of two returns by the product of standard deviation of the two returns Both measure the degree to which returns move together over time The advantage of the correlation coefficient is that it always ranges from -1 to + 1 which makes it easier to compare for different investment alternatives.

Question 23

Partitioning the IRR (or the discount rate) is said to be useful for comparing alternative similar investments. What is meant by this procedure and why is it meaningful?

Answer 23

For the purpose of obtaining the relative weights of the components of th e CF from operation and the CF from property sale. This is useful for comparing alternative similar property investments. The riskier portion of the return is generally believed to be that which is based on property price appreciation

Question 24

What is meant by Adjusted Basis and for what calculation purpose is it used?

Answer 24

Adjusted Basis is the cost of the property less any depreciation during the period ownership. It’s used for calculating the capital gain and capital gain taxes.

Question 25

What is meant by “loss to lease”?

Answer 25

The lease is favorable for the tenants but not for the owners, i.e. the difference
between current market rent and rents actually collected based on lease terms with each
tenant.

Question 26

What are some of the potential problems with using “going-in” cap rate that is
obtained from previous property sales transactions to value a property being offered for
sale today?

Answer 26

Problems might occur if the comparables have different lease terms, maturities, and
credit quality of tenants. Further, if properties are older, have depreciated, have different
functional design etc. that the subject property if this is the case cap rates must be either
adjusted to reflect theses difference or not used at all.

Question 27

Market analysis components

Answer 27

*Evaluation of supply and demand for a type of property
*Absorption
*Supply of Space
*Market Rents
*Forecasting Supply, Demand, Market Rents, and Occupancy