Unit 9 - 13 Flashcards
A developer purchases 20 acres of pasture on which to build a Super Target store and a Home Depot. The demographics in the area, and the traffic counts on the two boundary roads, support the project. What type of tax should most concern the developer?
A. Current use
B. Highest and best use
C. Rollback
D. Assessment
Correct Answer: C. Rollback
Explanation: Rollback taxes are often imposed when property changes its use, such as from agricultural to commercial, and can significantly impact a developer’s costs.
What is the greatest concern for a lender regarding property taxes?
A. Nonpayment of property taxes is an early warning sign of borrower trouble
B. Nonpayment of property taxes could trigger the consequences of a super priority
C. Foreclosure by the lender might result in loss of waivers and unacceptably high holding costs
D. Increasing taxes might increase total expenses in excess of required DCRs
Correct Answer: B. Nonpayment of property taxes could trigger the consequences of a super priority
Explanation: Property taxes have a super-priority lien status, meaning they can override the lender’s lien, putting the lender at significant financial risk.
A newspaper article reports City Council approval of the following projects for an area of town in which you are considering investing. Which item might indicate increased property tax expenses in the near future?
A. New library
B. Expansion of local high school
C. Widening a major artery
D. Additional 1.5 miles of sanitary sewer
Correct Answer: C. Widening a major artery
Explanation: Public infrastructure improvements, such as road widening, often lead to higher property assessments and increased taxes for surrounding properties.
In most jurisdictions, disputes over property appraisals upon which taxes are calculated can be accomplished through the:
A. City council
B. Board of adjustment
C. Board of equalization
D. County (or parish) tax board
Correct Answer: C. Board of equalization
Explanation: The Board of Equalization handles disputes over property valuations and ensures tax assessments are fair and accurate.
Which property right is probably NOT liable for property taxes?
A. Twenty-year ground lease
B. Three-year residential lease
C. Mineral rights
D. Life estate
Correct Answer: B. Three-year residential lease
Explanation: Short-term leases, like a three-year residential lease, do not typically create a taxable interest, unlike longer-term leases or ownership interests.
Keyword: Ad Valorem Tax
Definition: A tax levied according to value, generally used to refer to real estate tax. Also called general tax.
Keyword: Appropriation
Definition: A taxing body authorizes the expenditure of funds and provides for the sources of the funding.
Keyword: General Real Estate Tax
Definition: A tax that is made up of the taxes levied on the real estate by government agencies and municipalities.
A property is encumbered by both a senior and junior loan. If the property is sold at foreclosure, after costs, the:
A. Senior lender is required to pay the balance of the junior loan.
B. Junior lender will be paid first.
C. Senior lender will be paid first.
D. Courts will decide how to divide the proceeds.
Correct Answer: C. Senior lender will be paid first.
Explanation: In foreclosure proceedings, the senior lender has the first claim to the proceeds after foreclosure costs, as their lien is considered superior to any junior liens.
Keyword: Special Assessment
Definition: A tax or levy customarily imposed against only those specific parcels of real estate that will benefit from a proposed public improvement like a street or sewer.
Keyword: Tax Levy
Definition: The formal action to impose the tax, usually by a vote of the taxing district’s governing body.
Your client wishes to purchase an apartment building and assume the existing mortgage at the original interest rate. There is no due-on-sale clause in the mortgage. Your client:
A. Must renegotiate the loan.
B. May assume the mortgage whether qualified or not.
C. May assume the mortgage only if qualified.
D. None of these.
Correct Answer: C. May assume the mortgage only if qualified.
Explanation: Without a due-on-sale clause, a buyer may assume an existing mortgage, but qualification ensures the lender’s approval and reduces their risk.
Rollover loans are advantageous to lenders because:
A. They can automatically be rolled over to the next buyer.
B. They have short payout periods.
C. There are no due-on-sale clauses in the loans.
D. They allow interest rates to be adjusted.
Correct Answer: D. They allow interest rates to be adjusted.
Explanation: Rollover loans include provisions for adjusting interest rates periodically, enabling lenders to align with current market rates.
After the notice of foreclosure of a note and mortgage, the borrower can:
A. No longer bring the loan current and regain the property.
B. Make partial payments and regain the property.
C. Bring the loan current anytime until the auction sale of the property.
D. Bring the loan current at any time.
Correct Answer: C. Bring the loan current anytime until the auction sale of the property.
Explanation: Borrowers retain the right to reinstate the loan by paying overdue amounts in full up to the point of the foreclosure auction.
The owner of an apartment complex with long-term financing in place wishes to sell in Year Four of the mortgage loan. Which clause in the note and mortgage or deed of trust should be examined for its potential economic impact?
A. Default
B. Defeasance
C. Indemnity
D. Exculpatory
Correct Answer: B. Defeasance
Explanation: A defeasance clause may require the borrower to provide additional funds or securities to release the mortgage lien, affecting the economic viability of the sale.
Keyword: Acceleration Clause
Definition: A contract provision that allows a lender to require a borrower to repay all of an outstanding loan if certain requirements are not met.
Keyword: Adjustable Rate Mortgage (ARM)
Definition: A mortgage loan that has an interest rate that is changed (adjusted) periodically based upon an index agreed to between a borrower and a lender.
Keyword: Assumable
Definition: A loan that may be taken over (assumed) by a buyer when purchasing a parcel of real estate. Often requires the lender to approve the new buyer.
Keyword: Bridge Loan
Definition: A short-term loan used until a person or company secures permanent financing or removes an existing obligation.
Keyword: Caps
Definition: Limits to the increase in either the interest rate or payment amount under an adjustable-rate mortgage. Often includes an annual limit and a lifetime limit.
Keyword: Ceiling
Definition: An absolute maximum rate of interest that may be charged under an adjustable-rate loan.
Keyword: Commercial Mortgage Backed Securities (CMBS)
Definition: A type of mortgage-backed security that is secured by mortgages on commercial properties instead of residential real estate.
Keyword: Conduit Loans
Definition: Commercial mortgage-backed securities (CMBS), also called conduit loans. Such loans are originated through mortgage brokers, usually made for 10-year terms at fixed interest rates, and are fully nonrecourse, meaning with no personal liability by the borrower.
Keyword: Collateral
Definition: Property—real or personal—pledged as security to back up a promise to repay a debt.
Keyword: Construction Loan
Definition: An open-end mortgage loan, usually for a short term, obtained to finance the actual construction of buildings on a property.
Keyword: Contract for Deed
Definition: A contract under which the purchase price is paid in installments over a period of time during which the purchaser has possession of the property but the seller retains title until the contract terms are completed. Usually drawn between individuals. Also called a land contract, installment contract, or agreement for sale.
Keyword: Debt Coverage Ratio (DCR)
Definition: The number of times the annual net operating income will pay the annual debt service as required by the lender.
Keyword: Deed of Trust
Definition: A financing instrument in which the borrower/trustor conveys title into the hands of a third-party trustee to be held for the beneficiary/lender. Also called a trust deed.
Keyword: Default
Definition: Nonperformance of a duty; failure to meet an obligation when due.
Keyword: Defeasance
Definition: The substitution of collateral.
Keyword: Defeasance Option
Definition: Allows the borrower to exchange another cash-flowing asset for the original collateral on the loan.
Keyword: Deficiency Judgement
Definition: The difference in the amount received at an auction of defaulted property between the amount owed and the amount received as an award to the lender.
Keyword: Draws
Definition: A system of payments made by a lender to a contractor as designated stages of a building’s construction are completed.
Keyword: Exculpatory Clause
Definition: (1) A clause sometimes inserted in a mortgage note in which the lender waives the right to a deficiency judgment. (2) As used in a lease, a clause that intends to relieve the landlord from liability for tenant’s personal injuries and property damages.
Keyword: Due-on-sale Clause
Definition: A clause in a mortgage or trust deed that stipulates that a borrower cannot sell or transfer the property without prior written consent of the lender. Also called an alienation clause.
Keyword: Forbearance Agreement
Definition: An agreement to postpone, reduce, or suspend payment due to a loan for a limited and specific time period.
Keyword: Foreclosure
Definition: Court action initiated by the mortgagee or a lienor for the purpose of having the debtor’s real estate sold to pay the mortgage or other lien.
Keyword: Four Major Food Groups
Definition: Life companies look for loans in four major food groups—multifamily, office, retail, and industrial.
Keyword: Graduated Payment Loan
Definition: A loan for which payments increase regularly over time.
Keyword: Hypothecation
Definition: The act of pledging real estate as security without surrendering possession of the property.
Keyword: Index
Definition: A benchmark that is used to adjust the interest rate in an adjustable-rate loan; for example, the one-year Treasury bill.
Keyword: Interim
Definition: A use for property until it can be put to its highest and best use.
Keyword: Loan-to-Value Ratio (LTV)
Definition: A financial term used by lenders to express the ratio of a loan to the value of an asset purchased.
Keyword: Junior Loan
Definition: Any loan that is not in first lien position.
Keyword: Lien
Definition: A legal claim that one party has against the property of another as security for a debt.
Keyword: LIBOR
Definition: A benchmark rate that some of the world’s leading banks charge each other for short-term loans.
Keyword: Lock-out Clause
Definition: An absolute prohibition against an early prepayment.
Keyword: Mortgage
Definition: A document that makes property security for the repayment of a debt.
Keyword: Negative Amortization
Definition: Less than Interest-Only loan payments, which cause the balance of a loan to increase by the amount of the deficient interest.
Keyword: Nonrecourse
Definition: A loan or other financial tool with no personal liability by the borrower.
Keyword: Note
Definition: A signed instrument acknowledging the existence of a debt and promising repayment.
Keyword: Partially Amortized Loan
Definition: A loan that has a series of payments—part principal and part interest—that is not sufficient to pay off the total loan at maturity. There is a remaining amount of principal (a balloon) that must be paid at the end of the loan term.
Keyword: Recourse
Definition: A legal agreement that gives the lender the right to pledged collateral in the event that the borrower is unable to satisfy the debt obligation.
Keyword: Sale-Leaseback-Buyback
Definition: A financing arrangement under which an investor purchases real estate owned and used by a business corporation, then leases the property back to the business, including a buy-back option.
Keyword: Senior Loan
Definition: Any loan that has priority over another.
Keyword: SOFR (Secured Overnight Financing Rate)
Definition: A benchmark interest rate for dollar-denominated loans and securities.
Keyword: Split-Fee Financing
Definition: A financing arrangement wherein the lender purchases land and leases it to a developer, while at the same time financing the construction of the improvements.
Keyword: Sponsor
Definition: A key individual or entity with management experience that partners with cash investors to execute a project, leveraging their track record and expertise.
Keyword: Subject To
Definition: Becoming responsible for an existing loan without assuming personal liability.
Keyword: Take-Out Commitment
Definition: An agreement by a financial institution or investor to make a long-term loan at a specified date in the future.
Keyword: Term Loan
Definition: A loan to be paid in full at a specified time; not an amortizing loan.
Keyword: Wraparound Loan
Definition: A new loan that encompasses existing loans without altering the legal priority of the underlying loan.
Keyword: Variable Interest Rate
Definition: An approach to financing in which the lender is allowed to alter the interest rate based on a specific index, with notice. Monthly payments can change, or maturity can be extended, depending on fluctuations.
The costs for holding raw land for investment purposes would NOT include:
A. Opportunity costs
B. Mortgage payments
C. Taxes
D. Depreciation
Correct Answer: D. Depreciation
Explanation: Depreciation applies to improvements on the property, not to raw land. Land does not lose value due to physical or functional obsolescence, which makes depreciation inapplicable.
Your clients intend to buy land with little down payment and hold it until the area develops. What should they consider carefully?
A. The cost recovery effect on the land
B. Replacement value as a factor
C. Their age in relation to the investment duration
D. The holding costs associated with the investment
Correct Answer: D. The holding costs associated with the investment
Explanation: Holding raw land comes with recurring expenses such as taxes, insurance, and loan interest. These costs can significantly impact investment profitability.
Your investors plan to subdivide land for resale. Which of the following is NOT necessarily true?
A. This will most likely be an active investment
B. It may be necessary to refinance the property
C. It will probably require a zoning change
D. They must joint venture with a partner
Correct Answer: D. They must joint venture with a partner
Explanation: While subdivision projects often involve partnerships, a joint venture is not a strict requirement. Investors can subdivide land independently if they have sufficient resources.
In a build-to-suit situation, the single MOST important factor is:
A. Size of the proposed building
B. Zoning restrictions
C. Location of the land
D. Strength of the lessee
Correct Answer: D. Strength of the lessee
Explanation: The strength of the lessee ensures the reliability of income, which is critical for the success of a build-to-suit investment.
When purchasing a lot in a land-promotion subdivision, which of the following is NOT required in the contract?
A. An escrow collection to hold the deed until the contract is satisfied
B. A release clause from the underlying lender
C. A recognition clause from the underlying lender
D. An escape clause to cancel the contract anytime
Correct Answer: D. An escape clause to cancel the contract anytime
Explanation: While clauses providing security and clarity are standard, an escape clause allowing cancellation at any time is generally not feasible in real estate contracts.
Ownership by a corporate entity and proprietary leases to stockholders BEST describes:
A. Multiunit apartment
B. Condominium
C. Conversion condominium
D. Cooperative
Correct Answer: D. Cooperative
Explanation: Cooperatives are owned by corporate entities, and stockholders have proprietary leases rather than owning individual units outright.
An owner-occupant of a single-family home or condominium may deduct which of the following from income taxes?
A. Property insurance premiums
B. Depreciation
C. Repair costs
D. Interest
Correct Answer: D. Interest
Explanation: Interest on a mortgage is tax-deductible for owner-occupants, while expenses like insurance, repairs, and depreciation are not deductible for personal residences.
A tax credit of 10% on a $2 million low-income housing project for a 33% tax bracket investor results in which of the following savings?
A. $20,000
B. $66,000
C. $200,000
D. $660,000
Correct Answer: C. $200,000
Explanation: A 10% tax credit on $2 million equals $200,000. Tax credits directly reduce tax liability, offering significant savings compared to tax deductions.
The 1988 amendment to the Civil Rights Act added which of the following to the protective law?
A. Religion
B. National origin
C. Gender
D. Persons with disabilities
Correct Answer: D. Persons with disabilities
Explanation: The 1988 amendment expanded protections under the Fair Housing Act to include persons with disabilities and familial status.
Laws governing evictions for non-payment of rent:
A. Are uniform throughout the country
B. Are determined by each district court where the rental property is located
C. Vary according to federal law
D. Vary according to state law
Correct Answer: D. Vary according to state law
Explanation: Eviction laws and procedures differ by state, including notice periods, legal requirements, and court processes.
All of the following are advantages of office condominium ownership EXCEPT:
A. Controlled occupancy costs
B. Equity growth
C. Deductible depreciation expense
D. The ability to control future expansions
Correct Answer: D. The ability to control future expansions
Explanation: Unlike renting, office condominium ownership does not guarantee control over adjacent units for expansion.
Office rents are normally based upon:
A. Price per room
B. Price per square foot of useable space
C. Price per cubic foot of space
D. A percentage rent
Correct Answer: B. Price per square foot of useable space
Explanation: Useable square footage is the standard metric for determining office rental rates, excluding common areas.
To create a homogeneous tenancy in your office building where the primary tenant is a bank, you might approach:
A. Medical practitioners
B. The state for an unemployment office
C. Retail boutique-type tenants
D. Professional service tenants
Correct Answer: D. Professional service tenants
Explanation: Professional service tenants complement the bank’s presence and create a cohesive, business-oriented environment.
Three doctors approach you to rent office space for a medical clinic. You discuss a long-term lease with higher rent because:
A. Doctors are risky tenants
B. Doctors can afford to pay more
C. You anticipate extra expenses for build-out requirements
D. You assume they will want to lease for a long time
Correct Answer: C. You anticipate extra expenses for build-out requirements
Explanation: Medical offices often require specialized build-outs, increasing initial expenses for property owners.
In an office lease, which party is responsible for modifications necessary under the Americans with Disabilities Act (ADA)?
A. The tenant
B. Neither the property owner nor the tenant
C. The property owner
D. Both the owner and the tenant
Correct Answer: D. Both the owner and the tenant
Explanation: ADA compliance often involves shared responsibility, with landlords addressing common areas and tenants modifying leased spaces as needed.
A 40,000-square-foot shopping center anchored by a 20,000-square-foot supermarket is MOST likely to sell to:
A. The anchor tenant
B. An insurance company
C. A limited partnership
D. An individual or small partnership
Correct Answer: D. An individual or small partnership
Explanation: Smaller shopping centers typically attract individual investors or small partnerships rather than institutional buyers.
The advantage of shopping at a neighborhood center compared to a community or regional shopping center is:
A. More competitive stores
B. Lower prices
C. Less time required
D. More parking spaces
Correct Answer: C. Less time required
Explanation: Neighborhood centers are conveniently located for quick errands, saving time compared to larger centers.
The success of a small shopping center is generally tied to:
A. The level of debt service
B. Tax implications of the investment
C. The success of the tenants
D. The investment marketplace
Correct Answer: C. The success of the tenants
Explanation: A thriving tenant base ensures consistent rental income and attracts more customers to the center.
A national chain drugstore offers to pay a percentage of revenues above a base amount in exchange for a lower base rent. What are they asking for?
A. A trial period
B. Subsidization of start-up costs
C. Assurance of success
D. Sharing the risk of their success
Correct Answer: D. Sharing the risk of their success
Explanation: A percentage lease aligns the landlord’s income with the tenant’s performance, sharing the risk and potential reward.
Analysts estimate that a significant portion of the country’s malls are obsolete. What percentage is estimated to be obsolete?
A. 10%
B. 25%
C. 33%
D. 50%
Correct Answer: B. 25%
Explanation: Industry experts estimate that around 25% of malls are obsolete due to changing consumer preferences and economic conditions.
A manufacturer will be least interested in a site that is close to:
A. Raw materials
B. Its customers
C. Required labor pool
D. Its competition
Correct Answer: D. Its competition
Explanation: Manufacturers typically prioritize proximity to raw materials, customers, or labor over being near competitors, which might not provide a strategic advantage.
All of the following techniques are used to attract new industry into a community EXCEPT:
A. Industrial development bonds
B. Tax waivers
C. Subsidized plant locations
D. Low-income housing tax credits
Correct Answer: D. Low-income housing tax credits
Explanation: Tax credits for low-income housing are not typically used as an incentive to attract industrial businesses.
To enhance the value of an industrial park, you could provide:
A. Residential housing
B. More land per user space
C. Restaurants, hotel rooms, and meeting rooms
D. Uncontrolled signage
Correct Answer: C. Restaurants, hotel rooms, and meeting rooms
Explanation: Amenities such as restaurants, hotels, and meeting spaces add convenience and appeal, increasing the industrial park’s overall value.
In reviewing transportation linkages, an important consideration unique to industrial development is:
A. Air transportation access
B. Railroad and rail spurs
C. Road and highway access
D. Waterways
Correct Answer: B. Railroad and rail spurs
Explanation: Industrial facilities often rely on rail access for efficient bulk transportation of goods and materials.
Which of the following is NOT considered a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)?
A. Lenders as long as they perform no management functions
B. Anyone that installed the hazardous material
C. Anyone who produced the hazardous material
D. Previous owners
Correct Answer: A. Lenders as long as they perform no management functions
Explanation: Lenders are generally exempt from PRP status under CERCLA if they do not exercise management control over the property.
The popularity of manufactured home park investments is based on all of the following circumstances EXCEPT:
A. The relative ease of relocating the units
B. Higher standardized housing costs
C. Vesting pension and retirement programs
D. Increased population longevity
Correct Answer: B. Higher standardized housing costs
Explanation: Manufactured home parks are popular due to their affordability and flexibility, not higher standardized housing costs.
Hotel and motel investments are sometimes advantageous over other real estate investments because when the operators own the land and the building:
A. They are eligible for low-interest financing
B. They do not have to put much equity into the investment
C. They are considered a limited partnership
D. The income or losses from operations is considered active
Correct Answer: D. The income or losses from operations is considered active
Explanation: Active income or losses provide tax advantages for hotel and motel operators who own the property.
Franchise investments are often single-use buildings. To minimize risks, investors often:
A. Sell the building to the operators
B. Set rents to recoup their investment during the initial rental term
C. Draw plans to convert the building at the end of the lease term
D. Establish relatively short lease terms
Correct Answer: B. Set rents to recoup their investment during the initial rental term
Explanation: Recouping investment costs during the initial term reduces risk in case the franchise ceases operations.
All of the following are alternatives for receiving income from mineral rights EXCEPT:
A. Mortgaging the rights
B. Selling the rights
C. Selling the minerals
D. Leasing the rights
Correct Answer: A. Mortgaging the rights
Explanation: Mineral rights are generally monetized through leasing, selling, or extracting resources, not by mortgaging them.
An investment in real estate securities provides:
A. Trouble-free investments
B. A tax shelter for the investor
C. Longer holding periods than real estate
D. Less management than real estate investments
Correct Answer: D. Less management than real estate investments
Explanation: Real estate securities offer less direct involvement in management compared to owning physical properties.
Keyword: Air Rights
Definition: The right to use the open space above a property. Generally, the surface is used for another purpose.
Keyword: Americans with Disabilities Act (ADA)
Definition: Federal law that is designed to allow persons with disabilities reasonable access to public areas.
Keyword: Anchor Tenant
Definition: A major department store in a shopping center.
Keyword: Assemblage
Definition: The process of combining two or more parcels of real estate into one.
Keyword: Big Box
Definition: Big box stores, so named because they are shaped like a large one-story box, typically buy their own land, sell it to a REIT or subsidiary, and then lease it back. Examples of big box stores are Lowe’s, Walmart, and Costco.
Keyword: Build Out Allowance
Definition: Landlords often have a build-out allowance for new tenants, quoted as a certain dollar amount per square foot of leased space. The build-out allowance can be used to customize the space for the tenant’s needs and aesthetic demands.
Keyword: Build to Suit (BTS)
Definition: A building to be constructed to serve the special needs of a specific tenant.
Keyword: Business Park
Definition: A preplanned conglomeration of buildings in one area designed to house activities of a business nature.
Keyword: C-stores
Definition: There are almost 150,000 C-stores, also called convenience stores, in the United States. They typically sell fuel, snacks and drinks, food staples such as breakfast foods and some canned goods, small sizes of pet foods, and hot food such as pizza and chicken wings.
Keyword: Center Business District (CBD)
Definition: An agglomeration of businesses and services in the center of a city; “downtown.”
Keyword: Common Areas
Definition: Those areas in a condominium that are held as common areas.
Keyword: Community Shopping Center
Definition: A type of center that is larger than a neighborhood center but smaller than a regional center.
Keyword: Conciliation
Definition: An amicable, nonlitigious mediation that seeks to resolve complaints filed under open-housing laws with the local commissioner, who investigates accordingly.
Keyword: Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)
Definition: A federal law that defines liability for environmental cleanups.
Keyword: Condominium
Definition: The fee simple ownership of an apartment or a unit, generally in a multiunit building, that includes an undivided interest in the common elements.
Keyword: Conversion
Definition: (1) To change to another use, as changing rental apartments to condominiums or lofts to apartments.
Keyword: Congregate Care Center
Definition: A form of housing in which tenants have access to a communal dining room, physical and social amenities, and often, a health care center.
Keyword: Cooperative
Definition: A multiunit building whose title is held by a trust or corporation for the benefit of persons living in the building. The residents are beneficial owners of the trust or shareholders of the corporation, each possessing a proprietary lease.
Keyword: Corner of Main and Main
Definition: The most important intersection in a community or in a downtown office area.
Keyword: Credit Tenant
Definition: A commercial tenant large enough, and financially strong enough, to be rated as investment grade. Some projects require national credit tenants, and others are satisfied with regional credit tenants.
Keyword: Discount
Definition: A payment of less than the face amount of a security as a consequence of the contract interest rate being lower than the market rate.
Keyword: Factoring
Definition: Receivables sold to general cash flow.
Keyword: Fair Housing Act
Definition: A federal law that prohibits discrimination in the sale, rental, financing, or appraisal of most types of housing.
Keyword: Fannie Mae
Definition: A privately owned corporation, originally created as a federal agency, that provides a major secondary mortgage market.
Keyword: Franchise
Definition: By private contractual agreement, a business that uses a designated trade name and operating procedures.
Keyword: Freddie Mac
Definition: An organization that operates much like Fannie Mae to provide a secondary market for mortgages issued by the members of the Federal Home Loan Bank system.
Keyword: Functional Obsolescence
Definition: Defects in a building or structure that detract from its value or marketability, usually the result of layout, design, or other features that are less desirable than features designed for the same functions in newer property.
Keyword: General Obligation Bond
Definition: System of financing in which the community is held responsible for making payment for capital improvements, usually included in property taxes.
Keyword: Ginnie Mae
Definition: A federal agency created in 1968 to take over special assistance and liquidation functions of Fannie Mae. Ginnie Mae participates in the secondary market through its mortgage-backed securities pool.
Keyword: Going Dark
Definition: A lease clause specifying that the tenant must remain open and continue its business on 100% of its premises, ensuring the ambiance of a successful center regardless of retailer difficulties.
Keyword: Gross Rent Multiplier
Definition: A capitalization method used for calculating the approximate value of an income-producing commercial property based on the property’s gross rental income.
Keyword: Growth Management
Definition: Policies that control growth of a community.
Keyword: Hobby Tax Rules
Definition: Rules that limit allowable deductions on enterprises that do not clearly show a profit motive.
Keyword: Homogeneous Tenancy
Definition: A business tenancy in which similar or complementary goods or services are offered.
Keyword: Horizontal Regime
Definition: Condominium ownership of a unit above ground.
Keyword: Incremental Taxes
Definition: Additional taxes generated as a result of new industry moving into the area.
Keyword: Incubator Industrial Building
Definition: A structure provided by the community to encourage growth of a new company.
Keyword: Industrial Park
Definition: A controlled development designed to accommodate specific types of industry.
Keyword: Infant Industry
Definition: Newly formed businesses.
Keyword: International Council of Shopping Centers (ICSC)
Definition: The global trade association of the shopping center industry, founded in 1957.
Keyword: Interstate Land Sales Full Disclosure Act
Definition: An act of Congress passed in 1968 to facilitate regulation of interstate land sales to protect consumers from fraud and abuse in the sale or lease of land.
Keyword: Labor-intensive
Definition: A business depending more on labor than on machines.
Keyword: Leasehold
Definition: The tenant’s legal interest in a property.
Keyword: Location
Definition: Where the property is. An indispensable component for an evaluation analysis.
Keyword: Loft Building
Definition: A large, warehouse-type building usually located in a central city area.
Keyword: Land Banking
Definition: Purchasing and holding land for future development.
Keyword: Low-Income Housing Tax Credit (LIHTC)
Definition: Gave state and local LIHTC-allocating agencies the equivalent of $8.7 billion in annual budget authority in 2017 to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted at lower-income households.
Keyword: Mall
Definition: The common walking areas of large shopping centers.
Keyword: Manufactured Home
Definition: Prefabricated homes built in a factory and transported to a lot for installation.
Keyword: Mineral Rights
Definition: Ownership rights to all minerals located on or under land and to the profits realized from the sale of these minerals.
Keyword: Naming Rights
Definition: Branding rights for an office building, such as Wells Fargo Plaza in Houston, Texas, which is not owned by Wells Fargo but by MetLife.
Keyword: Net Lease
Definition: A lease requiring the tenant to pay the cost of operating the building, including maintenance, taxes, insurance, and repairs, in addition to the rent.
Keyword: Neighborhood Shopping Center
Definition: The smallest planned center.
Keyword: Office Park
Definition: A preplanned conglomeration of buildings in one area designed to house activities of a business nature.
Keyword: Off-Street Parking
Definition: Parking spaces on private land, as in shopping centers.
Keyword: Plottage
Definition: The subsequent increase in value of a group of adjacent properties when they are acquired by the same owner and combined into one property.
Keyword: Potentially Responsible Party (PRP)
Definition: An entity that, under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), may be liable for the costs of an environmental cleanup.
Keyword: Property Tax Lien
Definition: A lien placed on real property until such time as the property tax bill is paid.
Keyword: Railroad Spur
Definition: A branch line constructed to an industrial project for dockside loading and unloading.
Keyword: Proprietary Lease
Definition: In a corporate cooperative, the lease issued to an individual shareholder occupant.
Keyword: Real Estate Mortgage Investment Conduit (REMIC)
Definition: A pool of mortgages in which investors may purchase proportionate interests.
Keyword: Recognition Clause
Definition: A mortgage loan provision in which the vendor or mortgagee agrees in advance that if the promoter should default during the term of the agreement, the lender will respect the rights of subsequent lot owners and honor their contracts.
Keyword: Regional Center
Definition: A large agglomeration of shops and stores in one location. Includes more than one department store.
Keyword: Release Clause
Definition: A clause included in a blanket mortgage that provides that on payment of a specific sum of money, the lien on a particular parcel or portion of the collateral will be released.
Keyword: Repossession
Definition: The act of placing property into the hands of the holder of the security after foreclosure.
Keyword: Retirement Community
Definition: A residential community designed to fit the needs and lifestyles of older persons.
Keyword: Revenue Bond
Definition: Bonds to be repaid by the fees charged for the use of the funded project.
Keyword: Rezoning
Definition: The process of changing from one land use to another, usually more intensive.
Keyword: Royalty Income
Definition: Profits secured from mineral rights, oil wells, and publications.
Keyword: Secondary Market
Definition: A marketplace in which mortgages and trust deeds are traded. See also Fannie Mae, Freddie Mac, and Ginnie Mae.
Keyword: Securities
Definition: Something given, deposited, or pledged to make secure the fulfillment of an obligation, usually the repayment of a debt.
Keyword: Self-storage
Definition: Neighborhood storage facilities usually designed as individual cubicles; accessible daily.
Keyword: Sharing Market Uplift
Definition: A tenant may sublease a unit for rent higher than that stipulated in the original lease and share any excess rent profit with the landlord.
Keyword: Spot Zoning
Definition: A single property with a permitted use not in conformity with the surrounding properties.
Keyword: Strip
Definition: Part of REMIC’s assets, interest-only (IO), or principal-only (PO) portions of its inventory can be sold separately.
Keyword: Strip Center
Definition: Stores offering commodities and services, serving neighborhoods and cities, also called strip malls or convenience centers.
Keyword: Subordination Clause
Definition: A clause in an agreement that states the current claim on any debts will take priority over other claims formed in future agreements.
Keyword: Super-regional Center
Definition: Regional shopping centers that include apartment and office buildings.
Keyword: Surplus Land
Definition: Land not currently needed to support the existing improvements but cannot be separated from the property and sold off.
Keyword: Tax Credit
Definition: A credit applicable directly against taxes due; a 100% deduction.
Keyword: Time-share
Definition: A real estate ownership form permitting multiple buyers to purchase undivided interests in a resort condominium for specific time periods.
Keyword: Topography
Definition: The surface characteristics of land.
Keyword: Tranche
Definition: Parts of REMIC’s assets.
Keyword: Warehouse Building
Definition: Buildings used for storage.
What type of lease is most likely to have percentage rents?
A. Fast Food
B. Industrial
C. Apartments
D. Office
Correct Answer: A. Fast Food
Explanation: Percentage rents are common in leases for fast-food establishments and other retail businesses where the tenant pays a base rent plus a percentage of their sales.
You wish to rent an entire floor of a newly constructed office building, taking down 25,000 square feet of space on a five-year term with two renewal options. The rent is $38 per square foot per year. Of the following rental concessions you have requested, which one is LEAST likely to be granted?
A. Building naming rights and a $300,000 sign
B. Twenty-five reserved parking spaces
C. Build-out allowance of $25 per square foot
D. Rent reduction of $5 per square foot
Correct Answer: D. Rent reduction of $5 per square foot
Explanation: Rent reductions are less likely to be granted in competitive office markets, especially for large tenants committing to a long-term lease, as other concessions (like build-out allowances) are more common.
Which type of retail space is most likely to have the highest degree of management involvement?
A. Big Box
B. Neighborhood
C. Regional
D. Strip
Correct Answer: C. Regional
Explanation: Regional retail centers often have multiple tenants and require a high level of management involvement to coordinate operations, marketing, and maintenance.
The Service Members Civil Relief Act might allow some residential tenants the ability to:
A. Rent without a security deposit
B. Rent with lower than normally required credit scores
C. Rent at below-market rates
D. Cancel lease early without penalty
Correct Answer: D. Cancel lease early without penalty
Explanation: The Service Members Civil Relief Act protects active-duty service members by allowing them to terminate leases early without penalty under specific circumstances.
When establishing condo association dues, condo managers often establish an amount that will be set aside and accumulated to help defray future capital expenditures. This is called a:
A. Sinking fund
B. Reserve fund
C. Capital account
D. Assessment
Correct Answer: A. Sinking fund
Explanation: A sinking fund is specifically set aside for future capital expenditures, such as major repairs or improvements, ensuring financial readiness for significant costs.
Keyword: Building Owners and Managers Association (BOMA)
Definition: An association of building owners and managers founded in 1921 to address issues in the building management industry.
Keyword: Common-area Fee
Definition: In condominiums, the charge for taxes, insurance, maintenance, and so forth, apportioned to each owner, and in shopping centers, to each tenant.
Keyword: Common-area Maintenance (CAM)
Definition: Among the expenses often included in the net lease are common-area maintenance (CAM) charges to cover maintenance costs on items shared by the tenants, such as parking lots, atriums, public restrooms, hallways, and the like.
Keyword: Escalation Clause
Definition: A clause in a loan instrument that provides for increases in payments or interest based on predetermined schedules or on a specified economic index, such as the cost-of-living index.
Keyword: Eviction
Definition: The legal dispossession of an errant borrower or tenant.
Keyword: Graduated Lease
Definition: A contract specifying rental increases in regular increments.
Keyword: Institute of Real Estate Management (IREM)
Definition: A professional association of real property managers that awards the Certified Property Manager designation.
Keyword: Lease
Definition: A written or oral contract between a landlord (the lessor) and a tenant (the lessee), transferring the right to exclusive possession and use of the landlord’s real property to the lessee for a specified period and for a stated consideration (rent). Leases for more than one year must be in writing to be enforceable.
Keyword: Move Clause
Definition: Virtually all office leases have move clauses, which allow the landlord to move the tenant to comparable space in the building, as needed. The interpretation of what is comparable often gives rise to litigation between the parties.
Keyword: Option
Definition: An agreement to keep open an offer to sell or purchase property for a prescribed period.
Keyword: Percentage Clause
Definition: A clause in a contract that stipulates that a tenant pays a fixed percentage of the gross income against a specified minimum rental.
Keyword: Rental Concessions
Definition: Perquisites offered to entice new tenants, such as free rent for a few months or build-outs in the form of partitions or paint.
Keyword: Sinking Fund
Definition: A savings account designed to accumulate funds in anticipation of meeting a balloon payment.
Keyword: Tax Clause
Definition: In a lease, a clause requiring the tenant to pay any increase in property taxes over the base year’s amount.
Keyword: Tenant Mix
Definition: In a shopping center, the description of occupants by the types of businesses in which they are engaged.
Which of the following is a common earnest money substitute?
A. Standby letter of credit
B. Negotiable bonds
C. Liquidated damages
D. Option Money
Correct Answer: A – Standby letter of credit
Explanation: A standby letter of credit serves as a guarantee of payment and is commonly accepted as an earnest money substitute in real estate transactions.
The sales contract for a bakery/deli provides that all FF&E is included in the sale. What is NOT covered in the FF&E?
A. Office computer and copier
B. Telephone system
C. Tables and chairs
D. Store inventory and supplies
Correct Answer: D – Store inventory and supplies
Explanation: FF&E includes physical items used in operations (furniture, fixtures, and equipment). Inventory and supplies are typically excluded.
The title commitment:
A. Specifies the requirements necessary to insure title
B. Insures title up to the purchase price
C. Insures title up to the appraised value
D. Indicates that closing may now move forward
Correct Answer: A – Specifies the requirements necessary to insure title
Explanation: A title commitment outlines the conditions required for the title insurance company to insure the property’s title.
Tenant representations regarding the status of their lease, monthly rent, expiration date, and amount of security deposit are called:
A. Representations and warranties
B. Confirmation and understandings
C. Estoppel letters
D. Rent roll confirmations
Correct Answer: C – Estoppel letters
Explanation: Estoppel letters are used to verify the terms of a lease, confirming details such as rent and security deposits to avoid disputes.
On the preliminary settlement statement, a certain expense item is shown as POC. Who cares the most about this item and why?
A. Lender, because it can signal a potential priority lien
B. Seller, because it indicates a seller’s expense
C. Buyer, because it can be cleared as a contingency
D. Settlement agent, because it decreases gross funds payable at closing
Correct Answer: A – Lender, because it can signal a potential priority lien
Explanation: POC (Paid Outside of Closing) expenses are critical to the lender as they may indicate unpaid obligations that could affect the lender’s lien priority.
Keyword: 1031 Exchange
Definition: An exception to paying a capital gains tax on a recent gain of a sale, allowing a person to sell appreciated investment real estate and defer the payment of that capital gains tax by acquiring a like-kind property.
Keyword: Addendum
Definition: Any provision added to an existing contract without altering the content of the original. Must be signed by all parties.
Keyword: Assign
Definition: The transfer in writing of interest in a bond, mortgage, lease, or other instrument.
Keyword: Closing
Definition: An event where promises made in a sales contract are fulfilled and mortgage loan funds (if any) are distributed to the buyer.
Keyword: Consideration
Definition: (1) An exchange of promises. (2) Something of value that induces a person to enter into a contract.
Keyword: Contingency
Definition: Provisions in a contract that require a certain act to be done or a certain event to occur before the contract becomes binding.
Keyword: Earnest Money
Definition: Money deposited by a buyer under the terms of a contract, to be forfeited if the buyer defaults but applied to the purchase price if the sale is closed.
Keyword: Estimated Settlement Statement
Definition: An itemized list estimating all charges that will be imposed upon the buyer and seller in a real estate transaction.
Keyword: Due Diligence
Definition: An investigation to find all facts of material interest to an investor.
Keyword: Estoppel Letter
Definition: A document often used in due diligence in real estate, often completed or signed by a tenant.
Keyword: Indemnity
Definition: A clause that makes one party compensate the other for legal fees, expenses, and any settlement or judgment liability if the innocent party is sued as a result of actions or inactions of the other party.
Keyword: Financing Contingency
Definition: Gives the buyer the right to cancel the contract if the buyer cannot secure financing within certain pre-agreed parameters.
Keyword: Furniture, Fixtures, and Equipment (FF&E)
Definition: Abbreviation for furniture, fixtures, and equipment, commonly used in commercial real estate contracts.
Keyword: Letter of Intent (LOI)
Definition: A nonbinding agreement stating two or more parties’ desire to enter into a real estate transaction that provides an outline of the proposed transaction so the parties can negotiate before committing to a contract.
Keyword: Liquidated Damages
Definition: An amount predetermined by the parties to a contract as the total compensation to an injured party should the other party breach the contract.
Keyword: Net Proceeds
Definition: Expenses—either prepaid or paid in arrears—that are divided or distributed between the buyer and seller at closing.
Keyword: POC
Definition: The abbreviation for “paid outside of closing.” These are items that are paid for separately by the responsible party.
Keyword: Risk of Loss
Definition: The possibility of loss.
Keyword: Prorate
Definition: Expenses—either prepaid or paid in arrears—that are divided or distributed between the buyer and the seller at closing.
Keyword: Specific Performance
Definition: A legal action to compel a party to carry out the terms of a contract.
Keyword: Standby Letter of Credit
Definition: A document from a bank that guarantees “payment of last resort” if a client does not fulfill a contractual commitment to a third party.
Keyword: Title Insurance
Definition: A policy insuring the owner or mortgagee against loss by reason of defects in the title to a parcel of real estate, other than encumbrances, defects, and matters specifically excluded by the policy.
Keyword: Title Commitment Letter
Definition: A written commitment by the title insurance company that will insure title if certain itemized defects are removed by closing.
Keyword: Transaction Facilitator
Definition: One who represents neither the buyer nor seller.
