MiniCram Real Estate Investment Analysis
MiniCram Real Estate Investment Analysis
Study Notes & Practice Questions
UPDATED – 2020 Exams
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MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
TABLE OF CONTENTS
Disclaimer
Table of Contents
Introduction & Exam Format
Tips for the Exam
PART I – SUMMARY NOTES
1. Decision Making
2. Capitalization
3. Compounding and Discounting
4. Analysis of Investment Property
5. Operations Cash Flow
6. Sale Proceeds Cash Flow
7. NPV Calculations
8. IRR Calculations
9. Market Valuation
10. Leasehold Interests
11. Risk and Probability
PART II – MATH FORMULAS & PROCEDURES
PART III – USING HP FINANCIAL CALCULATOR
Monthly Payment, Principal Paid, Interest Paid and Balance
Net Present Value and Internal Rate of Return
PART IV – PRACTICE QUESTIONS
Sample Exam 1
Quick Answer Keys
Sample Exam 2
Quick Answer Keys
Sample Exam 3
Quick Answer Keys
Sample Exam 4
Quick Answer Keys
PART V – DETAILED MATH SOLUTIONS
Sample Exam 1
Sample Exam 2
Sample Exam 3
Sample Exam 4
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
INTRODUCTION
Dear Reader,
Congratulations on purchasing our MiniCram for OREA Real Estate Exam preparation. The
purpose of this book is to provide you with last minute review of important theory terms and concepts
for the exam.
This booklet has been written so that you can focus on key areas of study as well as prepare
to overcome most common mistakes the students make on the actual test day.
How to Use This MiniCram
You do not have enough time to waste. This MiniCram booklet is designed in such a way that
your review for the exam is fast paced. It is suggested that you go through each topic one by one. It is
assumed that you have already covered the topics in detail in either the actual class or by self-study.
We Want to Hear from You
This book is written by a practicing Real Estate Broker who is also a trained adult trainer. If
you have a feedback for the author, need more information or have general comments, please send
an email to minicram@outlook.com.
We hope you enjoy your review. Good luck for the exam!
------------------
REAL ESTATE INVESTMENT ANALYSIS - EXAM FORMAT
This 3-hour exam consists of a total of 50 Multiple Choice questions. Minimum 75% marks
are required to pass the exam. The breakup of marks is as follows:
First 12 Questions
1 Mark Each
12 Marks
Next 26 Questions
2 Marks Each
52 Marks
Last 12 Questions
3 Marks Each
36 Marks
Total Questions – 50
100 Marks
The HP 10B II Financial Calculator is required for this exam. The Mortgage Payment Factor
charts are also provided for your reference.
In case of paper exam, the exam booklet is separate from the answer sheet, which is a
machine-readable Scantron® sheet. The answer sheet is to be filled up with pencil only. On an iPad
exam, you may navigate the pages using the ‘Next’ and ‘Previous’ buttons.
For more information on the exam, visit the official website at www.orea.com.
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MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
10 TIPS FOR THE EXAM
1. RELAX. Too much anxiety, panic, stress and fear are big distractions. Focus on the
question and choose the best answer.
2. GAME OF WORDS. All multiple-choice exams are merely variation of words. If you
know your course materials, it's only a matter of interpreting the question and then
selecting a correct option.
3. EASY ONES FIRST. In this exam, the first 12 questions are easy, simple and
straightforward questions. Do these questions first.
4. READ ALL OPTIONS. Even if you think A is the correct answer, read options B, C and
D to make sure that they are incorrect.
5. MANAGE YOUR TIME WISELY. Divide your 3-hour time according to marks for each
question. Do not spend too much time on 1-mark questions. Skip the question that you
think is difficult to answer. Mark it for review and proceed to the next one.
6. EXTREME PHRASES. Beware of absolute words in any option. These words are ALL,
NONE, ALWAYS, NEVER, MUST, EVERY, EXACTLY, ONLY, etc. In most cases, the
options that include any of these words are rarely correct.
7. HEDGE PHRASES. When a question asks you to conclude something and includes
words such as MAYBE, LIKELY, OFTEN, ALMOST, USUALLY, GENERALLY,
TYPICALLY, SOMETIMES, etc., do not pick any answer that does not leave room for
any exception.
8. ALWAYS. Make it a habit to read the question twice. You must know what information is
given and exactly what is being asked. More than one choice may seem to be correct if
you do not understand the question properly. If that is the case, use the method of
elimination.
9. REMEMBER. Your first instinct is mostly a correct answer. Be careful when changing
your answer but don't be afraid if you have to change it.
10. REVIEW. Make sure you did not skip any question and the answer sheet is neatly filled
in. Never mark more than one answer. If you need to change a marked answer, erase
the previous one nicely. Otherwise, the machine may not be able to scan your answer.
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MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
PART I – SUMMARY NOTES
1. DECISION MAKING
Challenges in Investment Analysis
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Real Estate Investment Analysis refers to the relationship between the acquisition price
and future benefits from that investment.
Investment tools cannot be neatly packaged, and investors typically do not prefer
rational and systematic classification.
Comparison and valuation techniques do not provide clear picture. Appraisal methods is
mixed with Capital Budgeting and asset selection.
Registrants regularly perform taxation, accounting and financial calculations when
assisting clients and negotiating.
Investor’s Perspective
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Investment decisions may be affected by investor’s hidden traits, past events, personal
preferences, etc.
Nothing is average where investors are distinct, properties are unique and individual
investors tolerate greater degrees of risk.
One may be ready to offset lack of operating income with opportunity of capital
appreciation while another may tolerate financial risk in the hopes of strategic control.
Individual temperament, backgrounds and past track record cannot be ignored.
Preference for a particular building type or ownership type (sole, corporation, trust) may
affect decisions.
Most investment decisions are based on the Present Value of Future Benefits from
ownership. Most investors seek guidance and expertise to minimize risk.
Property Perspective
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Investors may prefer one property over another, based on features and benefits.
Decisions are subjective which vary from one investor from another.
Ultimately, all investors look for income to increase their returns.
Static vs. Dynamic Indicators
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Static (Traditional Analysis): Static Analysis refers to using Rules of Thumb for cash
flows along with valuation based on Direct Capitalization are used. A single year’s Net
Operating Income is considered.
Dynamic (Detailed Analysis): Dynamic analysis refers to forecasted cash flows over a
specific holding period. Capital Budgeting for acquisition, operation and disposition of
assets is considered.
Investment Value: The value from an individual investor’s perspective. It is based on
cash flow forecasts and returns. While both Before Tax and After-Tax cash flows are
considered, the true investment analysis is After Tax.
Market Value: Market Value is for a typical investor and not for an individual. Market
Value and investment value need not and is often not the same as Investment Value.
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Capital Budgeting
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It is the process of selecting capital assets based on allocation of limited resources with
the hopes of returns over an extended period.
Management people are involved in identifying specific projects which satisfy investment
objectives.
The most important criteria in Capital Budgeting is the expected rate of return.
The theory is based on fundamental premise that the value of a project depends on cost
in relation to future incomes.
The issue of financing does not appear in pure capital budgeting and this is known as
Whole Cost Approach.
Appraisers also do not consider financing during the evaluation process and concentrate
on capitalizing the net operating income or just analyze in terms of land and building
components. This is known as Holistic Approach.
Real Estate Analysis
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Traditional Capital Budgeting approach is not much in use because investment
properties are unique.
More focus is placed on financing options and Leverage because the success or failure
of a project depends on favourable terms of mortgage servicing.
Acquisitions are based directly on yield realized on equity investment.
Discounted Cash Flow or the Cash Flow Model is preferred due to its contribution of
financing and leverage.
Tax liability and built-in tax sheltering methods are frequently used in real estate
analysis.
Cash on Cash
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It is the relationship between one year’s Cash Flow Before Tax (CFBT) and the equity
investment (down payment).
This is a useful method of comparison and assumes that investment is for annual
income.
Other Terms: The Cash on Cash is also known as ➢ Cash Flow Rate,
➢ Equity Capitalization Rate,
➢ Equity Dividend Rate, and
➢ Return on Equity.
When return is assessed, the Annual Debt Service (mortgage payment) is subtracted.
Using this method alone for analysis would be risky if other factors are not considered.
Capital appreciation at the point of sale may impact return.
Different properties may show similar returns but may still be structurally different.
After tax cash flow is preferred by investors while this method does not consider tax
liability.
➢ Cash on Cash = Cash Flow Before Taxes ÷ Equity Investment X 100
Note: Equity Investment is same as Down Payment. It is also known as Cash Outlay.
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MiniCram Real Estate Investment Analysis
Modified Cash on Cash
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•
This is also known as Broker’s Rate of Return.
This method considers equity buildup by reduction of mortgage loan and the tax liability.
➢ Broker’s Rate of Return = (Cash Flow After Tax + Equity Buildup)
÷ Equity Investment X 100
Payback Period
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This is the time required for recoup (recapture) of initial investment or the number of
years when cumulative Cash Flow Before Taxes will equal Initial Investment.
It is a rough measure of risk, which means that the longer it takes to recover initial
investment, the greater is the risk.
The appreciation in value at the point of sale is not considered.
Time Value of Money (TVM) and tax liability is not considered.
Any factors that may affect income or expenses are not considered.
Different properties may show similar payback period but may still be structurally
different.
➢ Payback Period = Equity Investment ÷ Cash Flow Before Taxes
Break-Even Ratio
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This ratio is used to compare properties based on their Gross Operating Income.
A positive Break-Even Ratio indicates that there is a Cash Cushion and the property can
tolerate increase in expenses or decrease in Gross Operating Income.
When inflation is high (increasing operating expenses) investors may accept a negative
Break-Even Ratio provided the property appreciates in value.
The annual operating expenses and mortgage payment are considered when performing
analysis.
The Return on Equity (Cash on Cash), appreciation in value and Time Value of Money
(TVM) are not considered.
This ratio should not be used in isolation.
➢ Break-Even Ratio = (Operating Expenses + Debt Service) ÷ Gross Operating Income
Gross Income Multiplier (GIM)
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Gross Income Multiplier (GIM) is preferred as compared to Gross Rent Multiplier
because income other than rent is also considered.
Typically, annual income is considered for analysis, but monthly income may also be
used.
Other Terms
➢ Effective Gross Income (for appraisal), and
➢ Gross Operating Income (for commercial properties).
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
•
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When capitalization method cannot be used for evaluation, appraisers use the GIM
method.
It is helpful method when detailed income/expense data is not available from market.
GIM assumes that properties are highly comparable and same approach is used for rent
calculations.
The GIM method does not consider operating expenses, debt service and tax liability.
➢ GIM = Sale Price ÷ Gross Operating Income
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MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
2. CAPITALIZATION
Capitalization Basics
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Capitalization refers to conversion of net income into an estimate of value.
Selection of a suitable capitalization rate can make or break an appraisal.
Two Methods are used - Direct Capitalization and Yield Capitalization.
Both Return On Investment and Return Of Investment are used in the Overall
Capitalization Rate (OCR).
Formulas
➢ Net Operating Income = Value X Cap Rate
➢ Cap Rate = Net Operating Income ÷ Value
➢ Estimate of Value = Net Operating Income ÷ Cap Rate
Direct Capitalization
•
Advantages
➢
➢
➢
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Reasonably reliable when detailed market research is done.
Widely accepted in appraisal profession.
Band (combination) of investment components provide precise analysis.
Residual methods (land and building values) help when a component is unknown.
Disadvantages
➢ No precise method to know the effect of leverage, risk, tax liability and capital
appreciation.
➢ True consideration for future events are not considered and the cap rate is derived
from financial analysis only.
➢ It may be difficult to establish a cap rate if good comparable sales are not available.
Overall Capitalization Rate (OCR)
•
This rate has two parts – the Rate of Return ON Investment (Discount Rate) and the
Rate of Return OF Investment (Recapture Rate).
•
OCR is also known as Blended Cap Rate and is based on market research using sale
price and net operating income of comparable sales.
•
Market Extracted OCR: This method simply uses met operating income and sale price
without going into complex calculations. The calculated rate includes both Return ON
Investment and Return OF Investment. It also includes Real Return (cost of funds
without risk) and the Risk Factor.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
➢ Cap Rate = Net Operating Income ÷ Sale Price
•
Research Constructed OCR: When the OCR is calculated for a specific type of property
based on investor objectives. This is a virtual calculation without evidence of market
data.
➢ Research Constructed Cap Rate = Expected Rate + Risk Rate
•
Band of Investment Techniques (Land/Building Ratio): This method is a mix of both
Market Extracted and Research Constructed rates. The components are weighted
separately to arrive at an overall rate.
➢ OCR = Land Ratio X [Return Rate on Land + Building Ratio X
(Return Rate on Building + Recapture of Building)]
Equity Capitalization Rate (Equity Return)
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This rate shows the relationship between Cash Flow Before Taxes and the Initial
Investment (Equity).
This technique is popularly used due to financing and leverage options.
But two properties may show similar OCR but still give significantly different Equity
Return rates.
The investor looks at Equity Capitalization while the lender looks at Mortgage
Capitalization.
Equity Capitalization Rate and Mortgage Capitalization Rate can be analyzed
individually or a combination of both can be used to get an Overall Cap Rate (OCR).
Mortgage Capitalization Rate (Mortgage Constant)
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This rate is the relationship between Annual Debt Service (annual mortgage payment)
and the principal amount (loan).
In an amortized mortgage, this rate remains constant, but the principal keeps on
reducing with each payment.
➢ Mortgage Cap Rate = Annual Mortgage Payments ÷ Principal Amount
Terminal Capitalization Rate (Reversion Cap Rate)
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This rate shows the relationship between forecasted net operating income at the time of
disposition and the reversionary sale price.
Future sale price of the property must be estimated to estimate the Sale Proceeds Cash
Flow.
This rate is typically higher than the Going-in Rate because there is increased risk when
long range forecast is used.
At the time of sale, the property might have depreciated, economic life may be reduced,
and overall obsolescence may have occurred.
The net effect of this risk element is that the cap rate is increased to lower the estimate
of value.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
Split Rate Capitalization
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The Split Rate is useful for shopping centres and plazas where Base Rents and Overage
Rents are used.
In this method, different income streams can be split and capitalized according to the
risk.
This provides a more accurate analysis based on realities of the market place.
Overage Rent refers to the total of base rent and the percentage rent based on gross
sales.
Residual Methods of Capitalization
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Appraisers use these methods to capitalize the value of unknown component of the
property.
When limited or no information on comparable sales is available, real estate registrants
can use this method to estimate value when land and building value must be determined
separately.
Land Residual Method: This method is used when building value is known but land value
is not known.
Building Residual Method: This method is used when land value is known but building
value is not known.
Yield Capitalization
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This method utilizes projected income and expenses during the holding period.
This method can be used to estimate the Market Value as well as the Investment Value,
depending on assumptions and criteria used during the valuation process.
The Discounted Cash Flow methods consider both regular and irregular cash flows from
investment property.
Both the Operations Cash Flow and the Sale Proceeds Cash Flow are included along
with an appropriate Discount Rate to estimate the value.
The cash flows used can be either before tax or after tax.
Appraisers prefer Cash Flow Before Tax from a Reconstructed Operating Statement to
estimate market value.
Registrants prefer Cash Flow After Tax to estimate Investment Value.
The Discounted Cash Flow method is generally associated with Capital Budgeting when
the selection of investment opportunities is based on specific investor objectives.
Forecasted Cash Flows are preferred by large investors and portfolio managers.
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3. COMPOUNDING AND DISCOUNTING
Time Value of Money (TVM) Calculations
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Compounding and Discounting methods are used in Time Value of Money (TVM)
calculations.
These calculations have three functions each, and hence, a total of six functions.
In real estate investment analysis, Discounting is preferred as opposed to Compounding.
This is because analysis and comparison are based on forecasted cash flows and
values.
Compounding
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Compounding refers to the amount by which an investment grows over a given period.
including the interest accumulated.
➢ Compounding of a single amount into the future. For example, interest accrued on a
loan with monthly compounding, but it is not due until a future date.
➢ Compounding a stream of regular equal payments. For example, investment of
equal payments for a specific period at a given interest rate.
➢ Compounding a stream of regular equal payments to create a future amount. For
example, equal payments are made regularly so that a pre-determined amount is
created in future.
Discounting
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Conversion of future amounts into Present Value based on forecasted cash flows.
➢ Present Value (PV) of future amount. For example, calculating the present value of
$50,000 three years from now.
➢ Present Value (PV) of a series of future equal payments. For example, calculating
the present value of 36 regular payments of $350 per month.
➢ Payments required to Amortize an amount.
For Example: Calculating the monthly payment required to repay a loan of $50,000
at an interest rate of 5% in 36 equal payments.
Amortization
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Amortization refers to the gradual retirement of a loan (debt) using periodic partial
payments of principal and interest.
The amount for each periodic payment is based on the Amortization Schedule.
This type of payment is commonly associated with mortgage loans.
Each payment is known as Blended payment because it includes both principal and
interest components.
With successive payments, the principal component is increased, and the interest
components is decreased.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
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Fully Amortized Loan: The mortgage loan is paid in full by the maturity date. For
example, a loan is taken for a term of 5 years and the amortization period is also 5
years.
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Partially Amortized Loan: The amortization period exceeds the term and there is a
Balloon payment is left (outstanding balance). For example, a loan is taken for a term of
5 years, but the amortization period is 25 years.
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The Interest Act: For amortized mortgage loans, the interest must be calculated either
annually or semi-annually, not in advance.
TVM Calculations with HP 10BII
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Time Value of Money (TVM) Functions: Use to calculate Present Value (PV) of a single
amount or a series of cash flows with equal payments at regular intervals. Payment
period is same as compounding period.
➢ Compounding: Converting Present Value (PV) into Future Value (FV). To know how
much today’s dollars will grow in future.
➢ Discounting: Converting Future Value (FV) to Present Value (PV). Converting
tomorrows dollars into their present worth.
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Amortization Functions: Used to calculate a single payment or a series of payments at
regular intervals (e.g. monthly or bi-weekly). These functions calculate interest and
principal component or each payment and outstanding balance after a specific term.
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Interest Rate Conversion: To convert a Nominal rate into Effective rate. Useful when the
compounding period is different than payment interval.
For Example: Mortgage interest is compounded semi-annually, but payment frequency is
monthly or bi-weekly.
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MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
4. ANALYSIS OF INVESTMENT PROPERTY
The Analysis Worksheet
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The property analysis worksheet is adapted from Annual Property Operating Data form
used by the CCIM Institute.
It provides summary of cash receipts and cash disbursements analysis before taxes;
addresses various investment perspectives; and shows Net Operating Income (NOI) and
Cash Flow Before Taxes (CFBT).
This worksheet provides a structure for recording actual income and expenses of the
owner; allows for reconstruction of owners to reflect a typical property and forecasting
based on individual investor needs.
Owner’s Actual Statement
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The worksheet shows actual financial performance based on owner’s financial
statements or tax returns for a single year.
Provides opportunity to review the accuracy, organize figures, identify significant
variations and determine the Net Operating Income based on the existing report.
Detailed comparisons of financial alternatives can be discussed with the owner and a
new reconstructed statement can be created.
Cautions
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Missing or underestimated Vacancy and Credit Loss.
Maintenance and repairs done by owner himself may not be included or the given
amounts may not be correct.
Management expenses may be missing because owner himself is managing the
property.
Expenses may be done in previous years and not in the current year.
The existing leases may not reflect the current market rents.
Excluded Items
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Certain items appear in owner’s statement but should not be included.
Income tax for the property.
Capital expenses or Capital Cost Allowance (CCA) should not be included. They are
included for calculation of taxable income.
Reserve amounts for future replacement of any structural components.
Mortgage principal and interest should not be included. These are used for calculating
cash flow.
Analysis and Reconstruction
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The reconstructed operating statement is based on one-year analysis of income and
expenses, derived from owner’s statement.
It provides basis for extended cash flow forecasts for 5 to 10-year period.
The function is to produce a reliable statement of annual performance of a typical
investment property that is similar to the subject property.
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MiniCram Real Estate Investment Analysis
Potential Rental Income
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It is assumed that the building is fully occupied throughout the year.
All tenants are paying the market rent which is derived from highly comparable rental
properties at the time of analysis.
The actual or negotiated rent currently being paid is ignored.
Concessions given by the landlord are also not considered.
Vacancy and Credit Loss
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This loss is due to unit vacancies and bad debt caused by rent defaults.
Reasonable figure is obtained from property surveys or published surveys.
The vacancy rates and credit losses may vary depending on property types,
management, types of tenants and lease contracts.
Effective Rental Income
➢ Effective Rental Income = Potential Rental Income – Vacancy and Credit Loss
Other Income
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•
This is the income received form leasing of parking space, laundry, vending machines,
storage, roof space rentals and any other income.
Monthly income is converted into annual income.
Gross Operating Income
➢ Gross Operating Income (GOI) = Effective Rental Income + Other Income
Or
➢ GOI= Potential Rental Income – Vacancy and Credit Loss + Other Income
Operating Expenses
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Real Estate Taxes: Current annual property tax. The owner’s statement may be showing
past year’s property tax. Special assessments, assessment appeals or local
improvement taxes may alter the figures given by the owner.
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Property Insurance: Insurance should cover full replacement cost and applicable liability.
Premiums should be correct.
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Property Management: These expenses should be included based on typical
management fees even if the owner himself is managing the property. This fee is
normally a percentage of gross operating income.
•
Employee Payrolls and Benefits: Onsite property manager, administration staff and their
employee benefits should be added.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
•
Repairs and Maintenance: Reasonable costs for repairs and maintenance must be
included. Older properties may need replacement of equipment, updating of common
areas, elevator maintenance, washrooms, minor painting jobs, small
mechanical/structural repairs, lawn maintenance, etc. should be included
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Utilities: Current annual expenses for water, sewerage, electricity, oil/gas etc. should be
included. Waste removal charges and any environmental charges must also be included.
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Accounting, Legal Expenses and Leasing Commissions: Caution is needed because
smaller properties may not include charges for these services.
•
Advertising, Licensing and Permits: Annual expenses obtained from owner’s statement
or comparable properties should be included.
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Supplies: Electric bulbs, repair tools, paper products, janitorial supplies, maintenance
products, etc. should be included.
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Miscellaneous: Include any expenses not covered in given categories.
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Contracted Services: Snow removal, landscaping, pest control, security/alarm systems,
repair contracts for mechanical systems, etc. should be included.
Net Operating Income (NOI)
➢ Net Operating Income = Effective Rental Income – Operating Expenses
Annual Debt Service (ADS)
➢ Annual Mortgage Payments = Monthly Payment X 12
Cash Flow Before Taxes (CFBT)
➢ CFBT = Net Operating Income – Annual Debt Service
Forecasting
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Forecasting is typically based on market assumptions and investor objectives, and
should be clearly disclosed.
When properly adjusted to the needs of a specific investor, these forecasts can be a
powerful tool.
Reconstructed operating statement relies on strict appraisal rules regarding market
value but forecasting, while following same rules, may be adjusted to reflect investor
objectives.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
Considerations for Forecasting
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Income Details: The following are some tips for forecasting income➢ How long-term rents may affect a specific property.
➢ Market rent may not be achieved quickly given the current leases and lease options.
➢ Rising market rents may increase vacancy factors as tenants leave after term and the
units may remain vacant.
➢ Market rent may not be realized due to class of building, its condition and number of
amenities.
➢ Overall neighbourhood trends may impact potential rents and vacancy rates.
➢ Other income related to advertising and rental space may be affected in the long
term.
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Expenses: The following must be considered when forecasting expenses➢
➢
➢
➢
➢
Long range tax assessment and re-assessment may increase expenses.
Insurance costs may increase.
The required management may be off-site or on-site based on investor experience.
Repair and maintenance may have been deferred in the hopes of value appreciation.
The investor may require additional amenities or services which could affect
expenses.
➢ Advertising expenses may not be adequate to achieve investor objectives.
➢ Certain expenses may be reduced due to resources already available to the investor.
For example, he might have management and contracts in his other properties.
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5. OPERATIONS CASH FLOW
Completing the Worksheet
•
Summaries: The Operations Cash Flow (OCF) worksheet provides tax liability, cash
flows and cash flow before tax summaries for one to five years.
•
Tax Perspective: It is required to determine tax liability for a specific investment property
to calculate Cash Flow Before Tax (CFBT). Taxable income is rarely equal to cash flow
but provides a link to tax liability.
•
Cash Flow After Tax Perspective: It provides the investor with actual cash flow scenario
after tax considerations. The Operations Cash flow is combined with Sale Proceeds
Cash Flow to determine the rate of return.
•
Acquisition Price: This is the sum of down payment, cost of acquisition and mortgage
loan (debt). Only building component is used for Capital Cost Allowance (CCA)
calculations.
•
Mortgage Financing: This is the annual amount of mortgage payments. In other words,
monthly payment is multiplied by 12 to get this amount.
•
Net Operating Income (NOI): NOI is calculated based on the income and expense
statement.
•
Non-Operating Expenses: These expenses may be permitted, modified or denied by The
Income Tax Act.
•
Mortgage Interest: This is calculated based on selected financing arrangements for the
forecasted years.
•
Amortization of Loan Fees: Loan charges are typically amortized over a period of five
years but there may be some exceptions.
➢ They include mortgage brokerage fees, application fees and property appraisal fees.
➢ If the loan is amortized within the year of acquisition, amortization is not required for
some expenses.
•
Capital Cost Allowance (CCA): For buildings (improvement allocation of the acquisition
cost), there is no UCC in the beginning of the year. Simple calculations assume that no
more acquisitions or dispositions are done in the same class.
Marginal Tax Rate: This rate refers to the tax applicable on next incremental dollar of
income.
➢ The rates vary by income and type of property ownership (sole proprietorship or
corporation).
➢ Rates also change with the type of income (operational or sale proceeds).
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Capital Cost Allowance
•
•
•
•
•
•
•
•
The Income Tax Act recognizes that capital assets have a limited lifetime and, at some
point of time, will need to be replaced.
Capital Cost Allowance (CCA) is the tax deduction for those businesses which incur
depreciation or loss in value of their capital assets.
The Capital Cost of an asset is the value paid at the time of acquisition and includes real
estate, delivery fees as well as provincial sales tax.
The loss is value (depreciation) may be due to ageing, wear and tear or obsolescence.
CCA is not a cash flow item but just a tax-deductible item and is also known as ‘Tax
Department’s version of Depreciation’.
CCA applies only to physical, functional or economic depreciation but does not apply to
land, inventory and any other assets not intended for business operation.
The Income Tax Act does not require businesses to claim CCA.
Accumulation of CCA is also not permitted.
CCA Calculation Summary
•
Ownership/Use: The capital asset must be owned in order to claim CCA deductions.
➢ Type of ownership (co-ownership, partnership, corporation) can affect the procedures.
➢ The buildings must be available for use for CCA deduction, subject to exceptions.
•
Restrictions: Business income is treated differently from rental income.
➢ For example, a hotel business is different from a rental apartment building.
➢ The difference is based on the nature and extent of services provided to clients and
their scope of activity.
➢ Rental Property Restrictions: CCA deductions for rental properties can neither create
nor increase a loss when they are owned by individuals, partnerships and
corporations. But if a rental property is owned by a company whose principal business
is leasing, this restriction does not apply.
•
Classes & Pooling: The capital item must fall within a defined class for CCA deductions.
➢ Depreciable property in the same class can be pooled even if acquired in different
taxation years.
➢ Rental and other selected properties exceeding $50,000 must be placed in separate
class.
•
Capital Cost: Refers to the cost of acquisition (purchase) but certain exceptions apply.
➢ If funds are received from a public body for purchase, the cost is decreased by same
amount.
➢ Soft costs should be included in the year of construction and not in following years.
➢ Land cost is not a part of CCA calculations. Land is not a depreciable asset.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
•
Undepreciated Capital Cost (UCC): It is the capital cost of an asset less the CCA deducted.
➢ When a capital asset is acquired, the cost is added to that class.
➢ When a capital asset is disposed of, UCC is reduced by the capital cost for that class.
➢ In some cases, the land/building proceeds can be reallocated for tax purposes.
•
Recapture and Terminal Loss: Recapture occurs if there is a negative UCC balance due
to disposition of capital asset even though other assets remain in that class.
➢ Recapture is also known as Income Inclusion because the recapture must be
declared as income.
➢ Recapture may be deferred under certain circumstances. For example, another
property is acquired within a specified time and the recapture is applied against
UCC for new property.
➢ Terminal Loss: If UCC has a positive balance and assets do not have any value, a
terminal loss can be claimed.
Common Real Estate Classes
•
•
•
•
•
•
Class 1 – 4%: Majority of buildings acquired after January 1, 1988.
Class 3 – 5%: Buildings (masonry and concrete) acquired after December 1978 but
before January 1, 1988
Class 6 – 10%: Farming and agricultural buildings such as frame, log, galvanized iron or
corrugated iron buildings acquired before 1979.
Class 8 – 20%: Miscellaneous non-structural tangible property such as office equipment,
furniture, fridges, stoves, dishwashers and carpeting.
Class 13 – Straight Line Method: Leasehold improvements paid for by the tenant.
Class 17 – 8%: Exterior improvements such as parking, paving, walkways, parking lot
lighting and curbs.
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6. SALE PROCEEDS CASH FLOW
The Basics of Sale Proceeds Cash Flow (SPCF)
•
•
•
The basis of calculations is determined the time of acquisition when purchase price and
its building/land allocations are finalized.
Tax liability is an important part of investment decisions right from the time of purchase
up to the time of sale.
Operations Cash Flow (OCF) is subject to annual taxation and the sale proceeds tax
liability is imposed on investor at the point of disposition.
Business Income vs. Capital Gain
•
•
•
•
•
•
The taxpayer is responsible to report the income as business income or as capital gain.
If challenged by CRA, the onus of proof is on the taxpayer.
Tax Court of Canada hears appeals in this regard.
The factors considered include frequency of transactions, relationship of sale to
taxpayer’s business and intentions at the time purchase.
For example, if a real estate registrant buys and sells property many times a year,
chances are that the profits would be treated as business income.
Conversely, if someone buys a second property for investment and sells it after ten
years, there may be a case for capital gains.
Five Steps in Calculations
•
Recapture of CCA: Land/building allocations at the time of purchase and at the time of
sale are considered.
➢ Recapture occurs if the CCA deductions exceed the actual decline in value of the
capital property.
➢ Also, any improvements done during the holding period is a part of calculations.
➢ Since CCA is claimed on improvements only and not on land, the Building/Land
allocation at the time of acquisition and at the time of disposition is considered.
➢ Registrants should seek expert advice and perform Before Tax calculations only.
➢ Improvement Allocation at Purchase
= Original Purchase Price – Soft Costs – Land Cost
•
Income/Capital Gain: The basis for calculations is the sale price less any adjusted cost
base.
➢ Adjusted Cost Base is the cost of acquisition plus some adjustments permitted by The
Income Tax Act.
➢ As a general rule, most costs associated with the project would be capitalized.
•
Capital Gain: Whether the income is business income, or a capital gain depends on CRA
guidelines.
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MiniCram Real Estate Investment Analysis
➢ Capital Gain can only be calculated when a capital property is sold and is treated as a
separate source of income.
➢ If Capital Gain occurs, then 50% of the gain is taxable capital gain.
➢ If Capital Loss occurs, then 50% of loss is deductible from taxable capital gain.
•
Taxable Income: This depends on income, capital gain and the amount of recaptured
Capital Cost Allowance (CCA).
•
Marginal Tax Rate: The marginal tax rate determines tax liability to calculate the Sale
Proceeds After Tax.
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7. NET PRESENT VALUE
Discounting Basics
•
•
•
•
•
•
•
Multipliers and direct capitalization were used traditionally to compare investment
properties due to easy availability of data from the market.
Since assumptions and estimates are involved in these methods, the results provide
only a restricted snapshot of properties.
Modern analysis requires detailed examination of sequential income/expense forecasts,
holding periods and dynamic cash flow details.
Discounting methods for projection of cash flows and forecasts is now an accepted
standard.
Registrants face difficulties with difference in perspectives of a typical investor and a
specific investor because the cash flow analysis for both may be different.
A typical investor may be considering a Market Value, but a specific investor may be
looking for an Investment Value.
Other difficulties in analysis include –
➢
➢
➢
➢
Irregular cash flows,
Uncertainty of income trends,
Difficult to estimate expenses, and
Estimating final sale price after 5 or 10 years.
Present Value (PV)
•
•
•
•
•
Present Value (PV) is the present worth of future dollars and is used in value estimates
involving Yield Capitalization method.
PV is the sum of all monies (financial benefits) accruing to an investor using an
appropriate Discount Rate.
Historically, PV tables were used to estimate present value of variable income streams
(successive cash flows) or level income streams (successive equal lease payments and
mortgage payments).
These tables were based on complex calculations for including straight-line (constant
amount) or exponential-curve (constant ratio) changes in income.
Financial calculators have replaced traditional tables and they can easily convert cash
flows of various types into present value.
Net Present Value (NPV)
•
•
•
•
NPV is a measure of profitability and refers to the total of present or discounted values of
future cash flows netted against the initial investment.
This method is used to rank investment options by applying a discount rate to future
cash flows.
NPV is commonly used in conjunction with Internal Rate of Return (IRR) and is more
reliable than IRR.
The net value is calculated by first applying a discount rate is applied to all cash flows
and then the initial investment is subtracted.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
•
•
•
•
The Discount Rate refers to the interest rate (rate of return) used to calculate the
Present Value (PV) of the amount to be received in future.
Positive NPV means a surplus above the discount rate and a negative NPV indicates
that there is a loss in relation to the discount rate.
NPV is not for comparative analysis but is used for analyzing individual properties based
on absolute dollars received in relation to investor objectives.
Comparative analysis is only possible if the properties are highly comparable, equity
investment is same and identical discount rate is used.
NPV Profiles
•
•
•
•
NPV Profiles help investors visualize the positive or negative NPVs generated by
specific properties with the help of graphic illustrations.
NPVs of alternate individual investment properties is plotted for a range of discount rates
to analyze investment options.
The point at which the profile intersects (crosses) with zero indicates the yield or
discount rate for that specific property.
Different properties may show positive or negative cash flows depending on the what
discount rate is applied.
NPV Calculation Guidelines
•
Cash Flow Diagram: This diagram is commonly used to visualize a financial problem and
organize available information. When all cash inflows (incoming) and outflows
(outgoing) are plotted against a horizontal timeline, the financial problem is shown.
•
Caution: NPV does not consider differences in initial investment or the length of holding
period.
•
Positive NPV: When the received cash flows are more than required to meet the desired
rate of return based on selected discount rate.
•
Negative NPV: Insufficient cash flows to attain the benchmark discount rate selected by
the investor.
•
Zero NPV: When the cash flows are just sufficient to meet the desired benchmark of
discount rate. In this case the discount rate is equal to Internal Rate of Return (IRR).
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8. INTERNAL RATE OF RETURN
The Basics of IRR
•
•
•
•
•
•
•
•
Internal Rate of Return (IRR) indicates that specific Discount Rate at which the Present
Value (PV) of future cash flows is equal to zero.
IRR is used in Capital Budgeting by providing a measure of growth as a percentage rate
of return (%).
It is the yield (as an annual rate) on invested capital in a property because most
calculations involve forecasted annual cash flows over a holding period of 5 or 10 years.
IRR provides a method to compare different investment projects based on their ‘internal’
return on investment, especially when used with present value calculations.
Only internal cash flow calculations of the investment project are considered, and it is
not concerned with external influences.
Each property is viewed as a separate investment option and the IRR provides a
benchmark for comparing and screening purposes.
It provides a means to indicate whether a specific property meets minimum yield
objectives of the investor or not.
The process of calculations is ‘Iterative’ (repetitive) as opposed to direct. A range of
discount rates are used to narrow down to a rate where Net Present Value (NPV) is
equal to or near zero.
Limitations
•
•
•
•
Ambiguous results may provide more than one possible IRR answer, may occur with
more than one change in sign (+ or ‒) in cash flows.
IRR is a measure of positive productivity when operations cash flows exceed initial
investment. But negative cash flows must be closely scrutinized.
IRR can produce exaggerated results with little or no initial equity investment.
Comparisons based on pre-determined equity may be difficult because unused equity
amounts are not considered.
Ambiguity with IRR
•
Negative Cash Flows: In certain circumstances, the IRR may indicate ambiguous results
or no definite result because the IRR is subject to vulnerabilities of negative cash flows.
IRR is of little or no use when net present value is negative.
•
Sign Changes: IRR is vulnerable to sign changes (+ or ‒) in cash flows and can potentially
provide ambiguous results or no definite answer. This issue is addressed using Modified
Internal Rate of Return (MIRR).
•
Reinvestment: Distortions in Cash flows have been identified.
➢ When cash flow is positive, distortions may occur because the IRR assumes that
surplus cash will be reinvested at the IRR rate. This rate can be higher than the
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
reinvestment rate, the rate at which excess funds can be invested at more than the
safe rate.
➢ When cash flow is negative, distortions may occur because the IRR assumes that
funds kept aside for negative cash flows are discounted at IRR rate instead of the
realistic safe rate.
➢ With above reinvestment factors, two options may produce similar IRR when positive
or negative cash flows are considered along with actual safe rate or reinvestment
rate. But if these two rates are close to IRR, the distortions are minimum.
•
Comparing Properties: IRR is not useful when comparable investment properties need
different amount of initial investment. This is because different initial investment may
need different holding periods.
•
Internal vs. External Influences: The focus of IRR is strictly internal without any regard to
external influences or opportunities.
➢ IRR is not intended to assess alternative investments based on defined pool of
funds, nor it is designed to consider external yield for outward flowing positive cash
flows beyond the project.
➢ The function of IRR is best when it is used in conjunction with Net Present Value
(NPV).
Modified Internal rate of Return (MIRR)
•
•
MIRR is used when IRR produces ambiguous results and more than one negative cash
flow change occurs.
MIRR analyzes Present Value (PV) of negative cash flows and the initial investment
(equity) to the Future Value (FV) of positive cash flows.
•
Negative Cash Flows: Discounted to Present Value (PV) using a Safe Rate and added
to initial investment.
•
Positive Cash Flows: Compounded to Future Value (FV) at the end of holding period
using a Reinvestment Rate.
•
Advantages: MIRR addresses certain limitations of IRR calculations and excludes the
possibility of more than one IRR.
➢ MIRR eliminates sign change difficulties (+ or –) with IRR.
➢ It makes adjustments based on Safe Rate and Reinvestment Rates. (IRR assumes
that all surplus cash is reinvested at the IRR rate.)
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MiniCram Real Estate Investment Analysis
Financial Management Rate of Return (FMRR)
•
•
FMRR is used to analyze two or more investment options while avoiding limitations of
selected IRR and applying positive cash flows to negative cash flows.
If negative cash flows occur following a positive cash flow, the amount is discounted and
netted against positive cash flows.
•
Negative Cash Flows: The amounts are discounted to Present Value (PV) at a safe rate.
•
Positive Cash Flows: The amounts are compounded to Future Value (FV) at
reinvestment rate.
•
Advantages: Alternate investment options with different equity requirements and holding
periods can be analyzed.
•
Disadvantages: Some analysts argue that FMRR does consider external factors
whereas IRR is only meant for internal returns.
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9. MARKET VALUATION
Negotiations
•
•
•
•
Normally, Market Value is compared to select from several competing investment
properties.
Calculations of Investment Value, Present Value (PV) or Internal Rates of Return (IRR)
may also dictate the decision-making process.
Investment value is fine-tuned for a specific investor and reveals the preference order
among several properties from investor’s perspective.
Market values and investment values may theoretically be the same, but they are
normally different in practice.
Discounted Cash Flow Analysis
•
•
•
Present value (PV) is estimated using reconstructed Net Operating Income (NOI) and
Cash Flow Before Tax (CFBT) during the holding period to capitalize with an appropriate
discount rate.
In fact, so long as an appropriate Discount Rate is used, any stream of income may be
used (e.g. Potential Rental Income, Gross Operating Income, Net Operating Income,
Cash Flow Before Tax or Cash Flow After Tax).
The two methods of discounting are: Discounted NOI and Discounted CFBT.
Present Value with Discounted NOI
•
•
•
•
•
•
This method uses Weighted Average Cost of Capital (WACC) from the Operations Cash
Flow (OCF) worksheet.
NOI forecast is based on reconstructed operating statement during the holding period
and the reversionary value (value at the time of sale) is estimated using the terminal cap
rate.
The term Weighted Average Cost of Capital (WACC) refers to single yield rate used to
calculate present value.
This rate has proportionated weighting of the equity component as well as the debt
component of value.
The equity component reflects the before tax rate typically required by investors.
The debt component reflects the before tax return expected by lenders.
Present Value with Discounted CFBT
•
This method is based on Equity Yield and uses Cash Flow Before Taxes (CFBT) after
deducting the debt component of investment.
•
Step 1: Debt service is subtracted from net operating income and sale proceeds are
reduced by both the cost of sale and outstanding mortgage balance. This provides cash
flow before tax for both operations cash flow and sale proceeds cash flow.
•
Step 2: The above cash flow before tax is discounted using an appropriate rate. The
result is added to the present value of mortgage to get the market value.
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MiniCram Real Estate Investment Analysis
Valuation Guidelines
•
•
•
•
•
Yield Rate is not the same as the Capitalization Rate.
Yield rates apply to discounted cash flows, but income rates are associated with
capitalization.
Yield rates are determined from comparable sales and comparison of yield rates for
other types of investment.
Equity Yield Rates are also determined from comparable sales but specifically reference
to yield obtained based on investment in relation to operations and sale proceeds cash
flows.
The Weighted Average Cost of Capitalization (WACC) is popularly used. This yield rate
combines both the equity and the debt component of the yield.
Range of Values
•
•
•
•
•
•
Static Valuation methods provide a single value estimate.
Dynamic Cash Flow analysis use the forecasting variable and appraisers provide a
single value estimate based on reconciliation of data.
Discounted Cash Flow relies on various assumptions, which may be well researched,
but still the realities and unknowns of the market do not provide a clear picture of value.
Chances are that certain assumptions, which would produce a different value estimate,
are discarded.
Market risks considered by the appraiser also play a vital role and certain risks discarded
may produce different value estimate.
For all above reasons, value range estimates are gaining popularity as opposed to a
single value estimate.
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10. LEASEHOLD INTERESTS
Lease Terminology
•
•
•
•
Base Rent: Base annual or monthly rent that does not include operating expenses. It is
referred to as Base Rate when quoted per square foot.
Rentable Area: The actual area covered by the tenant plus proportionate share of
common area. Rentable area is typically used for comparisons
Usable Area: The actual area covered by the tenant excluding common areas
apportioned to the tenant.
Effective Rent: The annual, total or average dollar amount that includes base rent,
adjustments for concessions and costs. It is known as Effective Rate when quoted per
square foot.
➢ Included: Moving costs, operating expenses, parking, tenant improvement costs and
lease buyout costs.
➢ Not Included: Incidental costs which are required of user location and deemed
unnecessary for comparisons. For example, new office supplies required by the
tenant
•
Discounted Effective Rent: This refers to the Effective Rate either from tenant’s
perspective or from landlord’s perspective. They are different due to difference in what is
included.
➢ Tenant’s perspective: Effective Rent excludes lease buyout amounts, moving
expenses, etc. because these amounts are not paid to the landlord.
➢ Landlord’s Perspective: Includes all income received from the tenant such as base
rent, parking rent, etc. Concessions such as free rent period and allowances for
operating expenses are excluded.
Leasehold Interests
•
At the time of start of lease, the Fee Simple Estate (Freehold Interest) is divided in to two
parts.
➢ Leased Fee Estate: The partial interest stays with the landlord during the lease.
➢ Leasehold Estate: The partial interest that is conveyed to the tenant.
•
•
•
These partial interests can be valued individually.
The tenant’s Leasehold Estate reverts to the landlord at the end of the lease term.
Both the landlord and the tenant have specific rights and responsibilities during the lease
as per the lease contract.
Valuation
•
Leased Fee Estate Value: Refers to the landlord’s interest during the lease term.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
➢ First, the Present Value (PV) of the operations cash flow and the value of property at
the end of lease (reversion) is determined.
➢ Then, the value of Leased Fee Estate is calculated based on an appropriate
discount rate.
•
Leasehold Estate (Tenant): This interest refers to the value of tenant’s interest during the
term of the lease.
➢ Differential Cash Flow refers to the increase in value that accrues to the tenant due
to differences between the contract rent and the market rent.
➢ The Present Value (PV) of the Differential Cash Flow is used to estimate value of
Leasehold Estate by using an appropriate discount rate.
➢ Differential Cash Flow = Market Rent – Contract Rent
Leasing Cost Analysis
•
•
•
•
This analysis is used for comparison of alternative commercial lease properties.
The analysis can be done from either the landlord’s perspective or from the tenant’s
perspective (most common).
The Discounted Effective Rent, in which rents are discounted, is also used with an
appropriate discount rate to arrive at a present value (PV).
The full Cost of Occupancy must be determined from an Effective Rent calculation.
➢ Cost of Occupancy = Contracted Rent + Tenant Improvements – Landlord
Concessions
•
•
The tenant can include any such items which are not actually treated as leasing costs.
For long term leases, various other costs and landlord’s concessions can be inserted
into successive years of lease.
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11. RISK AND PROBABLITY
Risk Analysis
•
•
•
•
Investment Risk refers to possibility of variations from an expected forecast and is
inherent in all cash flow estimates.
Traditionally, risk analysis was broadly categorized into high risk and low risk only and
rational risk analysis was rarely performed.
Registrants can now perform risk analysis and adjustment techniques in negotiations for
a meaningful bargaining based on measurable risks.
Two methods used for risk analysis are –
➢ Sensitivity Analysis: This procedure involves examination of individual casual factors
and their impact on cash flows. This is a simple method to isolate various risk
variables.
➢ Probability Estimates: In this procedure, more accurate adjustments are performed
on cash flow forecasts based on quantifying risk.
Sensitivity Analysis
•
•
•
•
Sensitivity Analysis is typically associated with ‘best-case’ and ‘worst-case’ profiling or
examination of individual factors and their impact on returns (cash flows).
Various variables such as financial scenarios, are tested in relation to expected cash
flow forecasts.
Any specific cash flow component can be rigorously examined for a valuable insight
regarding risk associated with a particular project.
Manipulation of selected components helps analysts quantify the impact on present
value and rate of return.
Variable Sensitivity
•
•
•
•
•
Sensitivity from an investor’s perspective is like a warning signal and a slight change in a
sensitive variable may significantly impact the expected outcome.
The degree of sensitivity is important because one variable can impact returns more
than the other.
The relationship between the variable and its impact on outcome depends on the
variable being analyzed, the subject property and the cash flows.
The stronger the relationship (sensitivity) between the variable and its outcome, the
greater caution is required.
Examples –
➢ The Vacancy Rate may have more impact on cash flows than increase in cost of
utilities/services.
➢ Marginal Tax Rate for the investor may have higher sensitivity for the investor than
changes in the net operating income.
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MiniCram Real Estate Investment Analysis
Probability Basics
•
•
Probability is a numerical measure of the likelihood that an even will occur.
Knowledge of fundamental aspects of probability helps in more accurate forecasts and
better-informed clients.
➢ Values: The probability values are assigned on a scale from 0 (an event is unlikely
to occur) to 1 (an event is almost certain to occur).
➢ Outcome: A single event within a range of possible events. The probability assigned
to any outcome cannot be more than 1 and probability of various single events
within a range must have a total of 1.
➢ Sample Space: This refers to identification of all outcomes and is equal to 1.
Single Variable Probability
•
•
•
•
Single variable probability means that only one of the events may occur at a time.
Assignment of probabilities to events is helpful in quantifying risk more accurately.
It helps analysts in refining income projections, overall cash flow forecasts, capitalization
rates or discount rates.
Examples –
➢ The real estate market may be strong, weak or average; only one probability is
there.
➢ It is not possible that two events (variables) are simultaneously occurring.
➢ The real estate market cannot be strong as well as weak at the same time.
➢ In certain cases, odds may also be occurring based on previous market conditions.
➢ For example, 50% chances are that the market will be strong, 30% chances are that
the market will be average, and 20% chances are that the market will be weak. The
total must be 100%.
Probability and Risk Adjusted Discount Rate
•
•
•
Even a minor change in the Discount Rate can significantly impact both the present
values and the forecasted cash flows (returns).
Risk Adjusted Rate (or Weighted Discount Rate) refers to adjustment of Discount Rate
by assignment of market probabilities.
This helps in a more accurate rate and the investor can visualize a better overall
perspective.
Joint Probability
•
•
It is a numerical measure of the probability of two events occurring at the same time.
The probabilities may be independent events or may be dependent events.
Conditional Probability
•
•
This probability refers to the chances of an event if another event has occurred.
Conditional Probability analysis are frequently seen in real estate because several
factors are interrelated.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
•
Examples: The following probabilities may be determined from a joint probability table ➢ A broker of record may want to know the probability of listings given that the market
is strong.
➢ A broker of record may want to know the probability of sale when the market is
weak.
Methods to Assign Probabilities
•
Classical Approach: This approach is based on objective experimentation on all possible
outcomes within a Sample Space.
➢ The approach is built on equally likely events occurring and has little relevance in
real estate decision making.
➢ While two outcomes are possible, they may not necessarily be equal.
➢ This is the reason that Relative Frequency Applications have dominated in business
applications.
➢ Abundant data on real estate markets provides the required backdrop for relative
frequency applications.
•
Subjective Approach: This approach is used when historical date is available for analysis
to arrive at meaningful probabilities and reliable forecasts.
➢ The analysis is subjective due to its dependence on personal judgement of the
analyst and different analysts may arrive at different conclusions even when the
data is similar.
➢ First, the registrant reviews historical data to arrive at general probability factors.
➢ Then, personal judgement is applied to refine the results
Caution When Using Risk Adjustment
•
•
•
The discounting process itself places progressively increased discount on future dollars
due the involvement of time factor in calculation.
If significant risk premiums are not judicially applied, it may lead to a distorted picture of
investment scenario.
Registrants must use caution if the significant risk associated with any investment is
short term because long term prospects may look favourable.
-----------------Back to Table of Contents
MINICRAM NOTES
35
MiniCram Real Estate Investment Analysis
PART II – MATH FORMULAS & PROCEDURES
Net Operating Income
Annual Gross Potential Rental Income = Units X Monthly Rent X 12
Less: Vacancy & Bad Debt
= Effective Gross Income
Add: Other Income
= Gross Operating Income
Less: Operating Expenses
= Net Operating Income
Initial Investment = Purchase Price – Mortgage Loan
Cash Flow
Annual Debt Service = Monthly Mortgage Payment X 12
Cash Flow Before Taxes = Net Operating Income – Annual Debt Service
Cash on Cash = Cash Flow Before Tax ÷ Initial Investment
Modified Cash on Cash
Cash Flow Before Taxes
= Net Operating Income – First Year Mortgage Interest
Modified Cash on Cash = Cash Flow After Tax ÷ Initial Investment
Payback Period = Equity Investment ÷ Cash Flow Before Taxes
Break Even Ratio
= (Operating Expenses + Debt Service) ÷ Gross Operating Income
Cash Flow After Tax = Cash Flow Before Tax – Tax Liability
Gross Income Multiplier = Sale Price ÷ Gross Operating Income
Capitalization
Capitalization Rate = Net Operating Income ÷ Value
Estimate of Value = Net Operating Income ÷ Cap Rate
Band of Investment Cap Rate
= [(Land Ratio X Return Rate of Land) + (Building Ratio X Return
Rate of Building) + Recapture of Building]
MINICRAM NOTES
36
MiniCram Real Estate Investment Analysis
Equity Cap Rate = Cash Flow Before Taxes ÷ Initial Investment
Overall Capitalization Rate
= (Mortgage Cap Rate X Loan%) + (Equity Cap Rate X Equity%)
Reversionary Value = NOI for Last Year ÷ Terminal Cap Rate
Capital Gain and CCA
Capital Gain/Loss = Sale Price – Adjusted Cost Base – Cost of Sale
Taxable Capital Gain = Capital Gain X 50%
Sale Proceeds Before Tax = Sale Price – Cost of Sale – Mortgage Balance
Tax Liability = Sale Proceeds Before Tax X Marginal Tax Rate
Sale Proceeds After Tax = Sale Proceeds Before Tax – Tax Liability
CCA Using Declining Balance Method (Half-Year Rule)
Undepreciated Capital Cost EOY
= Undepreciated Capital Cost on Beginning of Year – CCA Claimed
Notes:
➢ In the Year of Purchase, Multiply the Purchase Price with Half Rate. In the Following
Years, Multiply with Full Rate. The CCA Rate is Provided in the Exam.
➢ CCA is Calculated only on Building Value. Land Does Not Depreciate.
-----------------Back to Table of Contents
MINICRAM NOTES
37
MiniCram Real Estate Investment Analysis
PART III - USING HP FINANCIAL CALCULATOR
Monthly Payment
For $250,000 loan, 5.5% annual interest rate, compounded semi-annually not in advance, and
based on 25-year Amortization period.
To Set Calculator to 6 Decimal Places
▲ DISP 6
Clear the Old Settings
Enter Nominal Interest Rate
Enter Compounding periods
Calculate Effective Interest Rate
Enter Payments Per Year
Calculate Revised Nominal Rate
Enter Loan Amount
Enter Amortization Period
Calculate Monthly Payment
▲C ALL
5 ▲ NOM%
2 ▲ P/YR
▲ EFF%
12 ▲ P/YR
▲ NOM%
250000 PV
25 ▲ xP/YR
PMT
➢ Note: The Monthly Payment is Displayed as (–) because it is outgoing money.
Principal Paid, Interest Paid and Balance
➢ Note: Do Not Clear the Calculator After Calculating Payment.
After EOY 5 (60 Payments)
Enter Payments in 5 Years
1 INPUT 60 ▲ AMORT
=
The Principal Paid is Displayed
=
The Interest Paid is Displayed
=
The Balance Amount is Displayed
-----------------Back to Table of Contents
MINICRAM NOTES
38
MiniCram Real Estate Investment Analysis
NPV & IRR with HP Financial Calculator
Initial Investment $80,000; Discount Rate of 8.5% and cash flow as Follows
EOY1 = 3,000
EOY2 = $3,200
EOY3 = $3,450
EOY4 = $3,580
EOY5 = $3,720
Sale Price After 5 Years = $760,000
➢ This is Also Known as Reversionary Value
Add Sale Proceeds to EOY5 Cash Flow
Cash Flow EOY5 = 760,000 + 3,720 = 763,720
Clear the Old Settings
Enter Payments Per Year
Enter Initial Investment
Enter Cash Flow EOY1
Enter Cash Flow EOY2
Enter Cash Flow EOY3
Enter Cash Flow EOY4
Enter Cash Flow EOY5
Enter Discount Rate
Calculate Net Present Value
▲C ALL
1 ▲ P/YR
80000 +/- CFj
3000 CFj
3200 CFj
3450 CFj
3580 CFj
673720 CFj
8.5 I/YR
▲ NPV
To Calculate Internal Rate of Return for Above
Enter Cash Flows as Above with CFj Button
Calculate Internal Rate of Return
▲ IRR/YR
-----------------Back to Table of Contents
MINICRAM NOTES
39
MiniCram Real Estate Investment Analysis
PART IV – PRACTICE QUESTIONS
SAMPLE EXAM 1
► NOTE: Take a blank sheet of paper to write your answers. The Quick Answer Keys are
located after the last question. This is followed by Detailed Math Solutions.
1. The Gross Income Multiplier for estimating value is:
A. The ratio of gross operating income to the sale price of a property.
B. May be used as a quick method for analysis before detailed analysis are undertaken.
C. Used by appraisers in situations when sufficient information is available to estimate
capitalization rate.
D. Calculated after deducting the annual operating expenses and tax liabilities.
2. A risk element is involved in all major investment decisions. Which of the following statements
is NOT correct in this regard?
A. Financial risk refers to increase in interest rates and purchasing power of dollar that may
go down in future.
B. Risk related to investment in real estate refers to fluctuations in income stream and
vulnerability of that income to external factors.
C. Building risk involves depreciation of the structure as well as unexpected calamities.
D. Market risk involves future taxation matters, overall economic activity and elimination of
forecasted profits.
3. Which of the following statements is NOT correct with respect to Payback Period?
A. The simple method of calculating the payback period has no limitations and is extremely
reliable.
B. The calculations follow the rule of thumb without considering the tax liability, which may
impact the investor’s expectations.
C. There is no recognition of any major factors that may affect the projected income or
expenses.
D. The method does not take into account the appreciation in the value of the property or
the time value of money.
4. Capitalization is the process of converting net operating income of a commercial property into
an estimate of value.
Which of the following statements is correct in this regard?
A. While the market extracted capitalization rate is preferred by appraisers, the recapture
rate is only used by real estate registrants.
B. The capitalization rate realized by analyzing the net operating income of an investment
property is theoretical in nature.
C. The more assumptions are made during estimate of a capitalization rate, the more
reliable is the analysis of an investment property.
D. Overall Capitalization Rate (OCR) is best known as a blended rate because both the
discount rate and the recapture rate are included.
MINICRAM NOTES
40
MiniCram Real Estate Investment Analysis
5. When calculating the gross revenue generated by a commercial property:
A. The potential rental income is based on the actual rents collected during a specific
period under analysis.
B. The appraiser will use the prevailing market rent from similar comparable properties and
then apply the vacancy and bad debt rate.
C. If the investment property is a residential apartment building, the appraiser must use a
standard vacancy and bad debt rate of 3% of potential income.
D. The Effective Gross Income is calculated by adding the actual rental income and the
vacancy and bad debt for a particular building.
6. The overall capitalization rate is most commonly used for evaluation of commercial and
investment properties.
Which of the following statements is correct in this regard?
A. When using the method of direct capitalization with the net operating income, a higher
rate results in higher value for the property.
B. Typically, appraisers would apply the overall capitalization rate to either before tax or
after-tax cash flows.
C. Depreciation of improvements on the property is an important consideration when using
the overall rate is applied.
D. The overall capitalization rate is extracted from the market, a risk factor of 1% is added
to compensate for market fluctuations.
7. Commercial property owners are permitted to claim Capital Cost Allowance (CCA) because:
A. The overall capitalization rate requires recapture of capital cost allowance.
B. The value of commercial and investment properties usually increases in value over a
period of time.
C. The amount of recapture increases the amount of payable taxes.
D. Depreciation occurs to the capital improvements of the property over the period of the
investment.
8. Recapture of Capital Cost Allowance (CCA) occurs:
A. When the undepreciated capital cost of a commercial property has a positive balance,
but no assets remain.
B. When the value of land has increased but the value of depreciable assets remained the
same or has decreased at the time of sale.
C. When the undepreciated capital cost of an asset at the time of disposition is more than
the undepreciated capital cost at the time of acquisition.
D. For all types of investment properties irrespective of the value at the point acquisition or
the value at the time of disposition.
9. The Adjusted Cost Base does NOT include:
A.
B.
C.
D.
The cost of acquisition.
The cost of sale.
The cost of improvements after acquisition.
Capitalized items.
MINICRAM NOTES
41
MiniCram Real Estate Investment Analysis
10. When completing the operations cash flow analysis, the loan fees are typically amortized.
Which of the following is NOT a correct statement in this regard?
A. Permitted loan fees are typically amortized over a period of less than 5 years.
B. Loan fees may include fees paid to a mortgage brokerage and mortgage application
fees.
C. Appraisal fees, standby fees, and commitment fees are also included in allowable loan
fees.
D. If the loan fees apply only to the taxation period and it is extinguished during that period,
amortization may not be required.
11. Which of the following is a correct statement with respect to Marginal Tax Rate?
A. It refers to the tax rate applied to the next one hundred incremental dollars of income.
B. It applies only to the operations cash flow but not to the sale proceeds cash flow.
C. It is a standard rate for all properties when real estate registrants are involved in
complex calculations, provided they fully disclose their assumptions to the clients.
D. It varies by the type of investment property and the type of ownership such as sole
proprietorship or corporation.
12. A negative amount for Net Present Value means that:
A.
B.
C.
D.
Future cash flows have been calculated incorrectly.
Future cash flows are less than the expected return required to match the discount rate.
A higher leverage ratio can be used to lower the initial investment.
An improper discount rate has been used to NPV calculations.
13. When analyzing the Cash on Cash returns on the subject property, the investor asks several
questions to salesperson Jenny. Jenny provides the following information to the investor:
“Cash on Cash is based on one year’s cash flow before taxes and the initial investment
you will make. When return is calculated, you need not worry about the annual debt
service. Calculations are useful when proper comparison is done with comparable
properties and assuming that there is no change in value. Cash on Cash calculations do
not consider the tax liability and we can simply divide the Cash Flow Before Taxes with
your initial investment to calculate the return.”
Jenny made an error in the above statements. Which of the following options describes the
error?
A. Cash on cash return is calculated based on at least five-year cash flow projections.
B. The investor need not get involved in lengthy and time-consuming analysis of
comparable sales because it is the subject property that actually matters.
C. Annual debt service is an important consideration and must be subtracted from the net
operating income to arrive at cash flow before taxes.
D. Both the applicable taxes and annual debt service must be considered to estimate the
cash on cash return on your investment.
14. An appraiser has analyzed the previous seven years cash flows for the subject investment
property and has arrived at a zero Internal Rate of Return (IRR). Which of the following is a
correct conclusion of this result?
MINICRAM NOTES
42
MiniCram Real Estate Investment Analysis
A. The future cash flows during the period of investment would be less than the amount of
the initial investment.
B. The future cash flows for the period of investment would be equal to the amount of the
initial investment.
C. The subject property is likely sold at a price lower than the original purchase price.
D. The accumulated amount of all annual cash flows from the property is a negative
amount.
15. First time investor Brian arranged a mortgage loan for the purchase of his property through
a mortgage broker. The broker told Brian that the interest rate quoted by the lender is known as
the Posted Rate or Nominal Rate. The mortgage payments are known as blended mortgage
payments.
Which of the following statements correctly apply to the interest rate on Canadian mortgages
with blended payment?
1. Mortgage lenders are permitted to compound the interest rate either annually or semiannually, not in advance.
2. Monthly compounding of mortgage interest rate is permitted if the compounding is done in
advance.
3. The effective rate for a compounded mortgage rate would be lower if monthly
compounding were permitted.
4. When blended payments are made more frequently than the compounding period, the
annual compounded rate becomes lower.
5. The federal Interest Act permits mortgage lenders to match the compounding frequency
with the payment frequency.
A.
B.
C.
D.
Only statements 1, 2 and 5 are correct.
Only statements 1, 3 and 4 are correct.
Only statements 2, 3 and 4 are correct.
Only statements 1 and 4 are correct.
16. Investor Raymond purchased two commercial properties in 2009. He sold both in 2015 and
made good profit on sale. In his 2015 annual tax return, he claimed the profit as Capital Gains.
Canada Revenue Agency sent a letter to Raymond concerning his tax return. If Raymond
claims that these properties were a part of his overall investment program:
A. Canada Revenue Agency must accept the taxpayer’s claim and treat the profit as
Capital Gain instead of treating it normal business income.
B. This may be treated as a valid argument for Capital Gain, provided the taxpayer is able
to support his claim.
C. The profit from sale of investment properties is always treated as Capital Gain and this
should not be a matter of dispute.
D. The taxpayer must go to the Tax Court of Canada to get an order that the gain realized
is capital in nature and not a business income.
17. A property was originally purchased in 2007 for $4,250,000 with the land allocated at
$760,000. During the years the property was owned, a total of $284,300 was claimed under the
allowable Capital Cost Allowance (CCA). The property now sells for $5,430,000 with the
MINICRAM NOTES
43
MiniCram Real Estate Investment Analysis
undepreciated improvements at sale being $4,900,000. Accordingly, which of the following
statements is correct?
A. The recaptured amount of CCA is $284,300.
B. The recaptured CCA does not apply as the undepreciated improvements at sale was
less than the original purchase price
C. The recaptured CCA is the difference between the improvement allocation when
purchased compared to when the property is sold
D. There will be no recapture of capital cost allowance claimed over the years.
18. The Operations Cash Flow worksheet includes calculations for annual debt service and the
annual interest paid on the mortgage loan. Which of the following statements explains why both
amounts are used in the worksheet?
A. The annual debt service is considered an expense while the annual interest is treated as
a cash flow item.
B. The annual reduction of principal amount is treated as a cash flow item while the annual
debt service is considered an allowable expense.
C. Cash flow calculations typically include the annual debt service, but the annual interest
paid on the mortgage is used for calculation of tax liability.
D. Capital Cost Allowance calculations include the interest paid on mortgage and the
annual debt service is used to calculate tax liability.
19. Capital Cost Allowance calculations for depreciable assets may involve various methods
and classification. When a capital asset is sold, recapture of Capital Cost Allowance may occur.
Which of the following statements is correct in this regard?
A. The undepreciated capital cost of an asset is the capital cost of the asset, less any
capital cost allowance already claimed.
B. Recapture of Capital Cost Allowance occurs at the time of disposition of asset
regardless of the acquisition cost.
C. The half year rule states that the assets purchased after July 1st qualify for only 50% of
allowance.
D. All calculations for Capital Cost Allowance follow the declining balance method.
20. The Internal Rate of Return (IRR) is essentially a discount rate at which the present value of
future cash flows is equal to the initial investment. But the process of calculations has some
limitations. Which of the following is NOT one of these limitations?
A. Ambiguous results may be obtained, which includes more than one possible IRR.
B. IRR is mainly used to measure positive productivity and negative cash flows may be
ignored during analysis.
C. Since IRR is an internal measure of productivity, comparison and analysis of alternate
investments based on pre-determined equity is difficult.
D. The IRR calculation methods are perfectly fine-tuned, and the results are straightforward with selected scenarios.
21. Select the correct statements with respect to yield rates and the discounted cash flow
valuation.
1. Yield rates apply to discounted cash flows, whereas capitalization utilizes income rates.
MINICRAM NOTES
44
MiniCram Real Estate Investment Analysis
2. Yield rates are typically derived from comparable sales and comparison of yield rates
achieved in other comparable types of investment.
3. Equity yield rates are most commonly derived from comparable sales, which occurred
preferably within the past few years.
4. When equity yield rates are estimated, specific reference is made to yields attained based
on invested capital in relation to the cash flows.
5. Because the equity discount method does not consider the debt, this method is most
widely used for analysis.
A.
B.
C.
D.
Only statements 1 and 3 are correct.
Only statements 1, 2 and 4 are correct.
Only statements 2, 3 and 5 are correct.
Only statements 3, 4 and 5 are correct.
22. Appraisers have typically given preference to a single value estimate based on market
research and reconciliation of appropriate date from comparable sales. Select the correct
statement with respect to value estimates from the options given below.
A. In the discounted cash flow method, the appraiser must isolate a specific cash flow built
on a set of assumptions.
B. Single-point valuation based on reconciliation of comparable data is valid for static as
well as dynamic analysis.
C. When the appraiser uses several sets of assumptions, the estimate of value is reliable
and defensible because all assumptions will essentially lead to the same value.
D. The appraiser must utilize only one set of assumptions because several assumptions
may lead to different value estimates, thereby distracting and confusing the investor.
23. Michael is the owner of a 22-unit rental apartment building. He intends to list this property for
sale. He wants salesperson Jenny to analyze his previous 12-month operating statement,
including income and expenses, to arrive at a reasonable value of the building. Jenny decides to
reconstruct the income and expense statement to provide an estimate of value. Which of the
following statements describes a valid reason for modification in the owner’s operating
statement?
A. Reconstruction of operating statement provides an accurate estimate for future capital
expenses for the buyer.
B. The buyer’s mortgage terms may make considerable impact on the profitability of the
operation.
C. The existing annual revenue from leased units shown in owner’s statement may not reflect
the current market rent from comparable properties.
D. The tax liability of the buyer may be significantly different from the current owner’s.
24. Knowledge of probability leads to more accurate forecasts and keeps the clients better
informed. Which of the following statements is correct with respect to probability?
A. Probability indicates the likelihood of occurrence of an event, typically given as a numeric
value between 0 and 1.
B. Probability is described as a series of statements so that the client understands the risks
involved in investment decision.
C. A probability with a value of 0 indicates that an event is almost certain to occur.
MINICRAM NOTES
45
MiniCram Real Estate Investment Analysis
D. A probability with a value near 1 indicates that an event is unlikely to occur.
25. Investor Bright is considering the purchase of a commercial rental building for $2,400,000.
The annual potential rental income from different units in the building is 547,500. Other income
from parking and storage spaces amounts to $1,680 per month.
The applicable vacancy and bad debt rate for this type of building is 5.5% of the potential rental
income. The estimated operating expenses are $316,700.
Bright is successful in getting an interest only mortgage loan at 5.5% per annum for 70% of the
purchase price. What would be the modified cash on cash return from this building for the first
year?
A.
B.
C.
D.
15.48%
12.73%
18.21%
17.84%
26. Mario is buying a rental property for the purpose of investment. The financial details of the
property provided by the seller show annual potential rental income of $1,040,000. Other
income from the building amounts to $16,400. The applicable vacancy and bad debt rate for this
type of rental building is 5.5% of the potential rental income. The annual operating expenses are
estimated at 53.5% of the gross operating income.
The purchase price is $4,200,000; out of which he will invest $1,800,000 from his own
resources. The balance of purchase price will be financed. With the monthly mortgage payment
of $25,000. Based on this information, what is the break-even for this property?
A.
B.
C.
D.
76.04%
83.52%
59.32%
92.28%
27. Investor Gloria Sanchez purchased a commercial building at 58 Charters Road. The purchase
price was $5,500,000 with mortgage financing for 60% of the purchase price. The monthly
payments are based on an interest rate of 5.75% and 25-year amortization period.
The annual potential rental income is $792,000 and the applicable vacancy and bad debt rate is
4.5% of the potential annual income. Other income from the building is $16,000 and the
operating expenses are estimated at 47% of the gross operating income.
Assuming that the net operating income remains stable each year, what is the payback period
the investor will achieve from this property?
A.
B.
C.
D.
7.22 Years
8.18 Years
11.5 Years
13.59 Years
28. The annual potential income of the subject property under consideration is listed for
$830,000 and its gross operating income is $117,200. The following comparable sales have
been located from the available market data:
MINICRAM NOTES
46
MiniCram Real Estate Investment Analysis
•
•
•
Sale 1: Sold for $950,000, Potential Income $121,800, Vacancy and Credit Loss 4%.
Sale 2: Sold for $906,500, Potential Income $114,840, Vacancy and Credit Loss 3.5%.
Sale 3: Sold for $880,000, Potential Income $112,230, Vacancy and Credit Loss 4%.
None of the selected properties have any additional income. Based on the comparable sales
given below, what is the reasonable value of this property?
A.
B.
C.
D.
$854,450
$437,900
$954,000
$621,300
29. Salesperson Jenny of Cram Realty Inc. is estimating the value of a commercial property
currently listed at $279,900. The projected net operating income is $27,200 and the cash flow
before taxes is $9,150. The property has an existing mortgage in the amount of $185,000.
Jenny’s research in the local market on comparable properties shows that the overall
capitalization rate is 11.2% and the equity capitalization rate is 14.80%. Based on this
information and using these two different capitalizations rate, what are the two estimates of
value of the listed property?
A.
B.
C.
D.
$320,400 and $305,230
$242,900 and $246,900
$418,800 and $396,250
$459,320 and $448,610
30. Investor Bright is considering purchase of a commercial property located at 22 Cram Square
Avenue. To ensure that he does not take a wrong decision, he has collected information on a
highly comparable property at 31 Eastgate Road, which is 2 blocks away from the subject. This
property was sold for $530,000 and had a mortgage in the amount of 280,000. The mortgage
loan is at 6.75% based on 25-year amortization. The mortgage payments are done monthly.
The annual net operating income is $64,800. What is the equity capitalization rate derived from
this comparable sale?
A.
B.
C.
D.
16.71%
18.37%
12.60%
15.07%
31. Investor Martin is interested to help his friend’s business venture as a silent partner. He
wants his investment to return in a period of six years. He is anticipating that the benefit of his
$120,000 is a long-term 50% interest in the business and the capital appreciation.
The business in question does not show sufficient cash flows and, as shown in the chart below,
generates negative cash flows in certain years. The 4-year cash flows from the business are as
follows:
•
•
•
•
Year 1
Year 2
Year 3
Year 4
MINICRAM NOTES
$4,500
$16,800
– $2,700
$12,500
47
MiniCram Real Estate Investment Analysis
What is the amount of monthly payments Martin must receive from his friend during the fifth and
sixth year to achieve his target?
A.
B.
C.
D.
$2,849.31
$3,704.17
$3,120.90
$2,238.13
32. Salesperson Kim Hadley is convinced that commercial investment properties typically have
a 25/75 allocation for the equity and mortgage components. A typical mortgage for $1,500,000
is available, which is 75% of the appraised value of the property, at 6.5% annual interest rate,
based on 25-year amortization. What is the mortgage capitalization rate?
A.
B.
C.
D.
6.29%
12.84%
8.04%
10.37%
33. A property is purchased for $1,350,000. The value of land is estimated at $540,000 with
improvement allocation at the time of purchase being $810,000. The CCA rate for such a
building is 4%. Using the declining balance method of calculation, what would be the
undepreciated capital cost at the end of three years of ownership?
A.
B.
C.
D.
$702,438
$681,930
$839,260
$731,566
34. Investor Henderson has a rental office building that generated a net operating income of
$219,500 in the previous taxation year. The property has a first mortgage of $898,300 at 7.5%
interest rate, monthly payments and amortized over 25-year period. Henderson made 12
mortgage payments in the past year. The mortgage loan has additional costs of $15,435, which
are also permitted to amortize over a period of 5 years.
The undepreciated capital cost of the building was $798,500 as of January 1st of the previous
year. If this brick and stone building falls in class 1 with a CCA rate of 4%, what is the taxable
income for the year?
A.
B.
C.
D.
$182,348
$118,562
$219,500
$203,240
35. Investor Mathew is considering purchase of a property for $950,000. He intends to finance it
with a mortgage for 70% of the purchase price. Mortgage loans are available at 6.5% per
annum, with for a term of 5 years and monthly payments based on a 25-year amortization
period.
Mathew has completed a projection for future cash flows for the property, with a 5-year holding
period. After that he intends to sell this property. At the time of sale, the estimated terminal
capitalization rate would be 10.5% with estimated cost of sale being $72,000. The projected
cash flows for the 5-years holding period are as follows:
MINICRAM NOTES
48
MiniCram Real Estate Investment Analysis
•
•
•
•
•
Year 1: Net Operating Income $78,300 and Cash Flow Before Taxes $26,102.
Year 2: Net Operating Income $83,250 and Cash Flow Before Taxes $32,356
Year 3: Net Operating Income $89,200 and Cash Flow Before Taxes $37,830.
Year 4: Net Operating Income $95,000 and Cash Flow Before Taxes $45,360.
Year 5: Net Operating Income $99,600 and Cash Flow Before Taxes $49,470.
Based on the above financial projections, what would be the Sale Proceeds Before Taxes on
the sale of the property?
A.
B.
C.
D.
$275,000
$310,300
$190,800
$240,000
36. The annual gross potential base rent in a commercial plaza is $152,640 and the annual
additional rent is $114,850. If the capitalization rates for base rent and additional rent are 9.5%
and 11.75% respectively, what is the estimate of value of this plaza, rounded to nearest $1000?
A.
B.
C.
D.
$2,848,000
$3,347,000
$2,584,000
$2,120,000
37. Investor Bright is considering two different investment properties to achieve a minimum
discount rate of 10.5%. The operations and sale proceeds cash flow information are as follows:
•
•
•
•
•
Initial Investment
EOY 1 Cash Flow
EOY 2 Cash Flow
EOY 3 Cash Flow
Sale Proceeds Cash Flow
Property A
Property B
$40,000
$4000
$8,000
10,500
$50,000
$50,000
$4,200
$3,860
$2,450
$84,200
What is the Net Present Value of each of these properties based on the expected discount rate?
A.
B.
C.
D.
$11,490 and $15,253
$10,226 and $16,010
$12,115 and $17,085
$12,872 and $16,903
38. Investor Vivian is considering purchase of a commercial property with an initial investment of
$120,000. The cash flow projections for this property are as follows:
•
•
•
•
•
•
EOY 1 = $22,000
EOY 2 = $19,000
EOY 3 = $16,000
EOY 4 = $14,000
EOY 5 = $10,000
EOY 6 = $11,300
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
The property is expected to sell for $180,000 at the end of 6 years. What is the Internal Rate of
Return (IRR) of this property?
A.
B.
C.
D.
17.90%
14.74%
16.27%
18.98%
Case Study – 2 Parts
Cram Realty Inc. is seriously considering the purchase of new state-of-the-art equipment for its
new branch office. The broker of record, Binny is planning to use a combination of existing
financial resources and a loan for a term of five years from the supplier. The supplier has
offered to finance the purchase at 6.5% annual interest compounded monthly. Based on the
given information, answer the following two questions.
Part 1 of 2
39. If the total purchase price of the new office equipment is $36,400 and broker Binny is ready
to invest $14,000; what will be the monthly payment for the balance of financed amount?
A.
B.
C.
D.
$289.32
$308.76
$438.28
$493.42
Part 2 of 2
40. The supplier of office equipment has also offered a 10% discount if broker Binny can
increase his initial payment by $2,500. If Binny agrees to increase his initial payment, what will
be the difference in his monthly payment?
A.
B.
C.
D.
$120.13
$150.68
$173.85
$98.20
Case Study – 2 Parts
Sarah Palmer, the owner of Made for Ladies Inc. is considering purchase of a flatbed truck for
delivering consignments of women’s apparels to her dealers. Sarah is willing to make a down
payment of $6,000. A local lender has offered her a loan for this purchase if the maximum
amount of monthly payment does not exceed $1,500 per month. Based on this information,
answer the following two questions.
Part 1 of 2
41. The current interest rate for financing of such commercial vehicles is 7.5% per annum,
compounded monthly. The maximum permitted amortization period is 5 years. What would be
the maximum purchase price she can afford?
A. $76,508
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
B. $94,230
C. $80,858
D. $121,770
Part 2 of 2
42. Sarah continues her financing options and finds another reputed truck dealer in the town.
This dealer is running a promotional campaign and is ready to finance the purchase on the
same terms and conditions as the lender, but the interest rate is 6.5% per annum, compounded
monthly. This will increase the maximum purchase price for Sarah. With the revised purchase
price, how much more loan Sarah will be able to obtain from the dealer?
A.
B.
C.
D.
$1,248
$1,760
$1,805
$2,110
Case Study – 3 Parts
With reference to the Sale Proceeds Cash Flow Worksheet provided in the text book, three
scenarios have been provided here. Complete the required calculations and answer the
following questions.
Part 1 of 3
43. Investor Scott had acquired a commercial property a few years ago for 620,000 and recently
sold it for $990,000. The building/land allocation was 65/35 both at the time of acquisition and
on the sale. During the years of ownership, Scott claimed a total of $154,283 as Capital Cost
Allowance. What would be the amount of Recaptured CCA shown in the Sale Proceeds Cash
Flow worksheet?
A.
B.
C.
D.
$16,204
$194,204
$108,500
$154,283
Part 2 of 3
44. Investor Matheson purchased had originally purchases an industrial property for $3,890,000.
He spent another $260,000 on renovations right after the purchase. This property was later sold
for $4,746,000. The cost of sale amounted to $91,370. This sale was deemed capital in nature,
but Matheson’s company did not qualify for any capital gain exemptions. How much Capital
Gain Tax Matheson would have to pay on sale of this industrial building?
A.
B.
C.
D.
$252,315
$172,925
$111,150
$148,961
Part 3 of 3
45. Investor Sanders sold one of his warehouses located at 1732 Natural Gardens Road and
realized a capital gain of $271,460. Because the improvements on the property had depreciated
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
below their value, a recapture of $59,207 was calculated. If the marginal tax rate of the investor
is 43.6%, what is the tax liability on sale?
A.
B.
C.
D.
$128,863
$144,171
$160,307
$157,426
Case Study – 5 Parts
This case study is based on your knowledge of investment analysis commonly performed by
real estate brokerages. Salesperson Jenny of Cram Realty Inc. is currently working with an
investor who is contemplating purchase of a small plaza with 20 units. She has researched the
local market and compiled the following information:
•
•
•
6 units with 850 sq. ft. rentable area can be rented at $11.50 per sq. ft.
8 units with 1,000 sq. ft. rentable area can be rented at $10.50 per sq. ft.
4 units with 1,120 sq. ft. rentable area can be rented at $9.25 per sq. ft.
The applicable vacancy and credit loss is 3.5% of the potential rental income. The building also
generates other income equal to 5% of the potential rental income. Market research shows that
an overall capitalization rate of 12% is reasonable for such properties.
Based on this information, help this salesperson by answering the following 5 questions.
Part 1 of 5
46. The operating expenses for the property are 55% of the gross operating income. The
investor will pay arrange a mortgage loan for 70% of the purchase price and pay the balance
from his own resources. If the monthly mortgage payment is $3,910.26, what is the cash on
cash ratio for this property?
A.
B.
C.
D.
19.26%
13.35%
17.68%
14.54%
Part 2 of 5
47. Using the calculations above, what will be the break-even ratio for this property for EOY1?
A.
B.
C.
D.
80.23%
54.30%
72.89%
92.17%
Part 3 of 5
48. A local lender has offered the loan for 6.5% interest rate based on a 25-year amortization
period. What will the annual debt service for the first year of operations?
A. $31,284
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
B. $34,726
C. $37,125
D. $39,425
Part 4 of 5
49. Use the calculations in Part 2 and Part 3 of this case study. Assume that the potential rental
income does not change in the following 4 years. The annual operating expenses for the
property are:
•
•
•
Year 2: 52% of Gross Operating Income
Year 3: 3.5% more than operating expenses in Year 2
Year 4: 56% of Gross Operating Income
Complete the following Operations Cash Flow worksheet:
Cash Flows
Gross Operating Income
186,852
186,852
186,852
186,852
– Expenses
= Net Operating Income
– Annual Debt Service
= Cash Flow Before Taxes
Based on the net operating income of the fourth year and using the terminal capitalization rate
of 12.75%, what is the estimated value of the property?
A.
B.
C.
D.
$539,800
$610,375
$644,824
$701,340
Part 5 of 5
50. The investor decides to go ahead with his decision to buy the property. He is willing to make
an initial investment of $200,000 for the purchase. He expects to sell the same property for
$800,000 after 4 years of ownership, with Sale Proceeds Cash Flow of $260,000. Based on the
cash flows calculated in the previous question, what would be the Internal Rate of Return?
A.
B.
C.
D.
22.02%
27.27%
19.76%
15.43%
-----------------Back to Sample Exam 1
Detailed Math Solutions
Back to Table of Contents
MINICRAM NOTES
53
MiniCram Real Estate Investment Analysis
QUICK ANSWER KEYS
SAMPLE EXAM 1
1. B
2. C
3. A
4. D
5. B
6. C
7. D
8. C
9. B
10. A
11. D
12. B
13. C
14. B
15. D
16. B
17. A
18. C
19. A
20. D
21. B
22. A
23. C
24. A
25. D
26. B
27. D
28. C
29. B
30. A
31. B
32. C
33. D
34. B
35. A
36. C
37. A
38. D
39. C
40. A
41. C
42. B
43. D
44. A
45. B
46. C
47. A
48. D
49. C
50. B
-----------------Back to Sample Exam 1
Detailed Math Solutions
Back to Table of Contents
MINICRAM NOTES
54
MiniCram Real Estate Investment Analysis
SAMPLE EXAM 2
► NOTE: Take a blank sheet of paper to write your answers. The Quick Answer Keys are
located after the last question. This is followed by Detailed Math Solutions.
1. The real estate investment analysis:
A. Rarely extends beyond traditional methods of static analysis.
B. Is a relationship between the cost of acquisition and the future returns from that
acquisition.
C. Are limited to multimillion-dollar projects wherein detailed dynamic capital budgeting
techniques are utilized.
D. Is an attempt to objectively package investment tools from the perspective the property
under consideration.
2. The operations cash flow from a commercial property:
A.
B.
C.
D.
Is typically used to estimate the value of a commercial property.
Is always analyzed on an after-tax basis.
Represents the cash flow realized from the reversion of the property.
Represents the cumulative money over the holding period.
3. Rather than using the basic cash on cash method of evaluation, the modified cash on cash
method is used because:
A. Mortgage financing options need not be considered during analysis.
B. This is a requirement under REBBA 2002 Code of Ethics for real estate registrants.
C. Proceeds from the sale of investment property considers the reduction of mortgage
principal.
D. Due consideration is given to investor’s equity build-up and reduction of mortgage debt
over a period of time.
4. A discount rate based on the Weighted Average Cost of Capital (WACC) is:
A.
B.
C.
D.
The relationship between the initial investment and the net present value of a property.
The rate at which the initial investment equals the future cash flows for the property.
The relationship between the principal amount of a loan and the annual debt service.
Applied to future income, including net operating income and sales proceeds, to
estimate the present value of an investment.
5. Which of the following is a correct statement with respect to comparative analysis of
investment properties?
A. The terms Investment Value and Market Value are same and can be used
interchangeably.
B. Cash on Cash usually refers to the relationship between a single year’s cash flow before
tax and the initial investment.
C. The Break-Even Ratio takes into account the capital appreciation of the property.
D. The Gross Income Multiplier represents the ratio of initial investment to gross operating
income.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
6. Which of the following statements is NOT correct with respect to Capital Cost Allowance
CCA)?
A. The amount of depreciation that can be claimed as CCA depends on the class of the asset.
B. One half of the allowable CCA for a specific class can be claimed during the year an asset
is acquired.
C. To maintain consistency in calculations, all depreciable assets must use the Declining
Balance method.
D. The disposition of a capital asset, for which CCA has been claimed, may involve recapture.
7. Which of the following statements is NOT correct with respect to Time Value of Money (TVM)
calculations?
A. If the period of the mortgage term and its amortization are same, the mortgage is referred
to as partially amortized mortgage.
B. Amortization refers to gradual retirement of a debt by means of periodic payments of
principal and interest.
C. Discounting is the process of converting future amounts to their present value.
D. Compounding is the amount by which an investment will grow over a given period of time.
8. In reconstruction of a Property Analysis Worksheet:
A. A standard rate of 3% is used for most rental apartment buildings.
B. The appraiser must include the expenses for typical management even if the owner is
managing the building.
C. The appraiser must not include any expenses that were not paid for in the previous 12month period but are paid every 5 years.
D. The net operating income is rarely an issue because investors mostly concentrate on
gross operating income.
9. In leasehold cost analysis, the effective rent:
A.
B.
C.
D.
Is viewed distinctly from landlord’s perspective and from tenant’s perspective.
Refers to contracted base rent only, when examined from tenant’s perspective.
Cannot be discounted even if a discount rate is available from the market.
From tenant’s perspective is essentially the same as from landlord’s perspective.
10. The difference between Net Present Value and Present Value is that:
A. Net Present Value is used to estimate investment value while Present Value is not used
for that purpose.
B. Present Value takes into account proceeds from a projected future sale while Net
Present Value does not.
C. Present Value is calculated using direct capitalization and Net Present Value is
calculated by using future cash flows.
D. Net Present Value compares the future income netted against the initial investment to
the investor's expectations for a rate of return, while Present Value estimates the present
worth of the future income.
11. When estimating the investment value of a property:
A. The valuation always begins with a reconstructed worksheet.
B. The rate of return is rarely affected due to investor preferences and management skills.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
C. Investment goals and objectives may affect the forecasted income and expenses.
D. The holding period is typically equal for different types of alternate investment options.
12. When Present Value is calculated using the Discounted Cash Flows:
A. The Overall Capitalization Rate (OCR) is applied to the future cash flows to estimate
value.
B. Market value is estimated by adding the present value of the mortgage and the present
value of the cash flows.
C. Sale proceeds are estimated by subtracting the initial investment from the reversionary
value of the property.
D. Present value of the investment is calculated by applying the equity capitalization rate to
the net operating income.
13. Which of the following statements is correct with respect to Overall Capitalization Rate
(OCR)?
A. The overall capitalization rate is a blend of mortgage capitalization rate and the equity
capitalization rate.
B. Sale price of at least three comparable properties is divided by their net operating income
to get the overall capitalization rate.
C. The yield capitalization method of evaluation utilizes the overall capitalization rate
extracted from comparable properties.
D. In its simplest application, the overall capitalization rate is utilized to convert the net
operating income of the subject property into an estimate of value.
14. Both the direct capitalization and yield capitalization are utilized in income approach to
estimate the value, but yield capitalization should be clearly distinguished from direct
capitalization.
Which of the following statements is not correct in this regard?
A. Yield capitalization is a method of capitalization based on discounted cash flows and
involves a wide range of assumptions.
B. Investment comparisons can be carried out by using yield capitalization based on investor
objectives.
C. Both yield capitalization and direct capitalization involve analysis of a single year’s
projected income to arrive at an estimate of value.
D. Direct capitalization uses a single year’s projected income and expenses whereas yield
capitalization uses income and expenses over a specified holding period.
15. Real estate investment analysis frequently use Time Value of Money (TVM) calculations
involving compounding and discounting. Which of the following statements is correct in this
regard?
A. Discounting is the process of converting a future projected amount, based on forecasted
cash flow, to its present value.
B. Compounding calculations provide an estimate for growth of an investment over a given
number time periods, except the accumulation of interest.
C. Compounding is more frequently used in investment analysis than discounting to analyze
a particular investment property.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
D. Discounting calculations involve analyzing a stream of future equal payments necessary
to produce a given future value.
16. The Canada Revenue Agency utilizes various factors to determine whether the gain realized
from sale of a capital asset is regular business income or a capital gain. Which of the following
is NOT one of these factors?
A.
B.
C.
D.
Taxpayer’s frequency of transactions for the same class during the taxation year.
Taxpayer’s intention at the time of acquisition.
The total taxable income reported for the taxation period.
Relationship of the transaction to regular business of the taxpayer.
17. The Adjusted Cost Base of a commercial property is a major component when determining
whether the disposition of a commercial property results in capital gain or capital loss. Which of
the following is a correct statement in this regard?
A. The Adjusted Cost Base is in fact synonymous with the term Capital Cost Allowance.
B. The Adjusted Cost Base represents the acquisition cost of the property, but no other
adjustments are permitted under the Income Tax Act.
C. The calculation does not consider the adjustment for cost of sale, legal fees, accounting
fees and realty commissions.
D. May include soft costs related to the construction phase when the property is developed.
18. Salesperson Jenny is completing the Sale Proceeds Cash Flow worksheet. She needs your
help in filling up the Capital Gains section of the worksheet.
Gain or Capital Gain
18.
Sale Price
825,500
19.
– Adjusted Cost Base
792,600
20.
– Cost of Sale
65,300
21.
= Gain or Capital Gain
– Capital Gain Exemption
22.
23.
= Capital Gain
24.
Taxable Capital Gain
0
Which of the following calculations is correct?
A.
B.
C.
D.
A capital gain of $32,400.
A taxable capital gain of $16,200.
A capital loss of 32,400
A capital gain of 38,300
MINICRAM NOTES
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19. Both the Present Value and the Net Present Value are calculated from cash flows and,
therefore, can reflect either the before tax or after-tax position of an investment. Accordingly,
which of the following statements is correct?
A. Present Value is the total of all values accruing to an investor discounted by a standard
rate of 10%.
B. Net Present Value, although a critical part of the analysis, is rarely a valid measure of
profitability.
C. When using the HP financial calculator, the Net Future Value refers to the future value of
the present value.
D. When comparing two properties for investment, the Net Present Value contemplates
differences in initial investment and holding period.
20. On the topic of Internal Rate of Return (IRR), identify which of the following statements
is/are correct.
1. The IRR is an external rate of return because it takes into account other factors over and
above revenue and expenses.
2. The IRR provides a measure of growth as a percentage rate, as opposed to Net Present
Value, which indicates value in dollars.
3. The IRR can produce exaggerated results in certain situations involving little or no initial
investment.
4. With IRR, it becomes easy for the analyst to compare alternative investments because
internal data of comparable properties is relatively easy to obtain.
5. When only initial investment is returned by way of periodic cash flows during the investment
period, the IRR will be zero.
A.
B.
C.
D.
Only statements 1, 2 and 4 are correct.
Only statements 2, 3 and 5 are correct.
Only statements 2, 4 and 5 are correct.
Only statements 1 and 4 are correct.
21. Which of the following statements is not correct with respect to analyzing market value of
investment properties?
A. The terms market value and investment value may be similar but, in fact, they are not.
B. The holding period for an investment must be less than the time period required to reach
stabilized operations.
C. Expenses may be included in the worksheets, whether or not these are shown on the
financial statement.
D. Valuation is typically based on net operating incomes and the cash flows before tax.
22. Investor Bahra is discussing acquisition of investment property with salesperson Jenny of
Cram Realty Inc. The topic of discussion is fulfillment of investment objectives. In response to
questions from the investor, salesperson Jenny makes the following statements:
1. The exact percentage yield depends on many circumstances and includes the return on
investment and the return of investment.
2. To achieve investment objectives both the operations cash flow as well as the sale
proceeds cash flow must be analyzed.
3. The cash flow is calculated by deducting the annual debt service from the gross operating
income of the property under consideration.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
4. Tax liability is a secondary issue, which may be ignored during analysis and the final
results are still reliable.
5. Some major factors that may impact return include cash flows, taxation and leverage.
Which of the above statements are correct?
A.
B.
C.
D.
Only statements 1, 2 and 3 are correct.
Only statements 2, 4 and 5 are correct.
Only statements 1, 2 and 5 are correct.
Only statements 1 and 3 are correct.
23. Leasehold interests constitutes a significant segment of the commercial properties.
Evaluation of leasehold interests may involve landlord’s perspective or tenant’s perspective.
From the statements provided below, identify the correct ones.
1. The effective rent from tenant’s perspective is different from landlord’s perspective.
2. Tenant costs do not include things such as moving costs and a buyout from a previous
lease.
3. Analysis of a leasehold interest in a specific property is typically based on gross building
area.
4. A leased fee estate valuation is the value of a tenant’s interest in a property during the term
of the lease.
5. The leased fee estate valuation involves calculating the present value of operations cash
flow and value of property at the point of expiry of the lease term.
A.
B.
C.
D.
Only statements 1 and 5 are correct.
Only statements 2 and 4 are correct.
Only statements 1, 4 and 5 are correct.
Only statements 1, 3 and 5 are correct.
24. Real estate investment decisions involve unpredictability and risk. Sensitivity analysis and
probabilities are often included to assess risk levels. Which of the following is a correct
statement in this regard?
A. Risk adjusted discount rates are used in most fields of investment analysis except in real
estate investments.
B. When market conditions become increasingly stronger, the investor should use a higher
discount rate.
C. Probability, when applied in its classical approach, does not utilize research but is based
only on investor’s personal judgement.
D. Sensitivity analysis refers to the methods by which an investor examines various financial
scenarios to assess their impact on cash flow and yield.
25. An investor is contemplating purchase of a rental apartment building in the downtown for
$6,250,000. He is using $1,850,000 of his own resources as a down payment and financed the
rest through a first mortgage at an annual interest rate of 5.75% with interest only mortgage
payments at the end of year. The operating statement shows annual potential rental income of
$825,000 with a vacancy and bad debt rate of 3.5% of potential rental income. Other income
from the building amounts to $25,500.
If the annual operating expenses are 43.25% of the annual gross operating income, what would
be the cash on cash return for the first year on this building?
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
A.
B.
C.
D.
14.38%
11.52%
13.85%
12.52%
26. Investor Steven decides to purchase a rental apartment building property for $990,000.
Steven obtained mortgage financing for 75% of the purchase price with an annual interest rate
of 6.25%; with monthly payments based on a 25-year amortization period.
The annual potential rental income for the property is $218,000, with an allowance for vacancy
and bad debt of 5.0%. Other income amounts to $10,250. The operating expenses are
estimated to be 56% of the Gross Operating Income. If the income and expenses remain
unchanged during the holding period each year, what would be the payback period for this
investment property?
A.
B.
C.
D.
3.60 years.
13.93 years.
6.64 years.
4.54 years.
27. Salesperson Jenny of Cram Realty Inc. is trying to estimate the gross operating income of a
property which is listed for sale at 950,000. Comparable sales in the area indicate that the range
of Gross Income Multiplier (GIM) for similar properties is between 5.55 and 5.80. If the listed
property is finally sold for $900,000 and, a vacancy and credit loss of 4.5% is used, what is the
higher limit of the gross operating income for that property?
A.
B.
C.
D.
$148,200
$120,430
$220,210
$154,742
28. Salesperson Jim Parker of Cram Realty Inc. is developing a cash flow analysis for a
commercial property located at 33 Finland Square. This property generates a net operating
income of $34,260. The market extracted overall capitalization rate (going-in rate) is currently
11.5%. Jim Parker estimates that the net operating income will increase by 9.5% per year for
the next three years. He estimates that the terminal capitalization rate will be 12.25% at the time
of sale. Based on this information, what would be the reversionary value of the subject
property?
A.
B.
C.
D.
$303,435
$297,180
$328,330
$367,200
29. The Cram Square Neighbourhood Mall annually generates a base rent of $562,224 and
percentage rent of $187,365. Market research shows that base rent is capitalized at 9.75% and
the additional rent is capitalized at 11.5%. What is the estimate of value of this property based
on split rate method of capitalization? Round your answer to nearest $1,000.
A. $7,015,000
B. $9,928,000
C. $7,396,000
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
D. $8,370,000
30. Investor Sarah requires a return of 10% on her investment in a commercial property. This
includes the real cost of funds as well as the risk factor. She also wants to achieve a return of
her investment. Typical properties in the area have a building/land ratio of 75/25.
Assume that the building in question has a life expectancy of 40 years, the rate would include a
discount rate of 10% and a recapture rate of 2.5%. Land does not depreciate and retains its
value. What is the overall capitalization rate using the band of investment method?
A.
B.
C.
D.
12.04%
11.88%
8.35%
14.20%
31. Marylin purchased a parcel of vacant industrial land seven years ago. She clearly intended
to hold it for investment. She is now selling this land for $670,000. Assuming that the value of
land has increased consistently by 12% every year, what was the original purchase price?
Approximately how much did she originally pay for the property?
A.
B.
C.
D.
$208,000
$182,900
$576,600
$303,074
32. A small rental apartment building has 10 one-bedroom units and 6 two-bedroom units.
Investor Bright is considering purchase of this building, but the building exteriors need extensive
repairs in about six-years from now. The cost of replacement of damaged items is estimated at
$120,000. The corporation that owns the building is setting up a sinking fund to address this
issue in future. If equal payments are deposited in this fund at the end of every quarter and the
fund earns an interest rate of 5.5% compounded quarterly, what quarterly payment is required
to receive a total amount of $120,000 in six years?
A.
B.
C.
D.
$2,538.90
$4,254.28
$3,320.64
$3,996.34
33. Investor Bright purchased an investment property many years ago in 1985 for $135,000. In
January 1996 Bright obtained an appraisal of this property for Capital Gains purposes indicating
a value of $195,000. Bright sold the property in 2009 for $750,000. Due to a number of
improvements Bright had made to the property over the years of ownership, the adjusted cost
base at the time of sale was $378,000. The allowable expenses for the sale amounted to $62,300.
Assuming that there were no Capital Gains exemptions, what would be the amount of taxable
capital gains?
A.
B.
C.
D.
$309,700
$195,000
$154,850
$668,000
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34. Broker Binny’s Cram Realty Inc. has been in business for several years. On June 10, 2016,
the brokerage purchased new office furniture for two of its new branch offices for a total cost of
$28,820. These items fall under 20% CCA class. Based on the Declining Balance method of
calculations and keeping in mind the rate for the acquisition year, what would be the
Undepreciated Capital Cost (UCC) at the end of three years?
A.
B.
C.
D.
$12,427.52
$13,385.38
$15,095.70
$16,600.32
35. A vacant parcel of land, where local zoning permits commercial development, requires eight
years of holding period. The initial investment required for this property is $35,000. The
forecasted sale proceeds from this property in the ninth year would be $110,000. What is the
Internal Rate of Return (IRR) from this property?
A.
B.
C.
D.
9.50%
11.83%
13.57%
14.96%
Case Study – 2 Parts
Investor Sherry is interested in purchase of an office building located at 230 Ferrari Circle. The
property is currently listed for sale at $2,550,000. The building has 26 small office units, 800 Sq.
ft. each, for which the current market rent is $11.50 per square foot. There are 20 larger office
units, 1,120 sq. ft. each, for which the current market rent is $12.75 per square foot. The
vacancy and credit loss for this type of office building is 3% of the gross potential rental income.
The annual operating expenses of the property are 52% of the gross operating income.
Based on this information, answer the following two questions.
Part 1 of 2
36. Assuming that the property does not generate any other income, what is the Gross
Operating Income would be generated by this property?
A.
B.
C.
D.
$509,506
$476,370
$414,550
$390,580
Part 2 of 2
37. Sherry will use 30% of the purchase price from his own resources and needs a mortgage
loan for the balance of the purchase price. Commercial loans are available at 6.25% per annum
based on monthly payments and a 25-year amortization schedule.
What would be the Cash Flow Before Taxes (CFBT) for this property?
A. $87,438
B. $93,300
MINICRAM NOTES
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C. $104,101
D. $120,622
Case Study – 2 Parts
Investor Bright is contemplating purchase of a small rental apartment building for investment.
He needs a mortgage loan of $725,000. Two different lenders have offered him the loan at
different terms. One of the lenders is offering an annual interest rate of 6.5% with a 15-year term
and amortization. The second lender is offering the same amount of loan at 6% annual interest
rate for a term of 10 year and amortization.
Based on the given information, answer the following two questions.
Part 1 of 2
38. Bright knows that interest rate is just one of the many things he has to consider before
accepting any of these loan options. What is the difference in monthly payment for each of the
two arrangements?
A.
B.
C.
D.
$899.37
$1,038.43
$1,237.50
$1,741.02
Part 2 of 2
39. If Bright selects the second lender with 10-year term, and how much interest would be
saved in the first 5 years?
A.
B.
C.
D.
$44,285.90
$35,169.63
$53,040.30
$22,548.50
Case Study – 3 Parts
Salesperson Jenny has reconstructed the operating statement provided by owner Henderson.
She has calculated that the gross operating income and the net operating income of the
property after making necessary modifications are $453,100 and $296,316 respectively. This
property currently has a fully open mortgage loan of $1,400,000 at an interest rate of 10% with
amortization period of 15 years. Similar mortgages are available for 8.5% per annum if the
amortization period is 25 years. Based on this information, answer the following questions.
Part 1 of 3
40. What is the current Cash Flow Before Taxes (CFBT) for this property using the
reconstructed operating statement?
A.
B.
C.
D.
$104,363
$98,472
$117,855
$121,300
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Part 2 of 3
41. Henderson decides to acquire the subject property for $1,975,200. A capitalization rate of
11.5% was used to estimate this value. The decision was based on the reconstructed operating
statement. He arranges a mortgage loan at 8.5% with 20-year amortization. What would be the
modified cash on cash ratio for the property with the new mortgage arrangement?
A.
B.
C.
D.
12.85%
14.41%
11.74%
14.38%
Part 3 of 3
42. What is the payback period in terms of years the property will provide to investor
Henderson?
A.
B.
C.
D.
9.61 Years
6.84 Years
8.47 Years
6.9 Years
Case Study – 3 Parts
Salesperson Jenny of Cram Realty Inc. specializes in investment properties. She is currently
working with investor Smart to select a suitable property from the available listings. Smart has
shortlisted three properties for consideration. Help salesperson Jenny in performing the given
calculations.
Part 1 of 3
43. Investor Smart has provided the following information to salesperson Jenny for investment
analysis. The details of the first property are as follows:
•
•
•
Initial Investment is $70,000
Operations Cash Flow for EOY1, EOY2 and EOY3 are $4,200, $4,110 and $4,350
respectively.
Sale Proceeds Cash Flow is $91,000
If a discount rate of 8% is used, what is the Net Present Value (NPV) of this property?
A.
B.
C.
D.
$13,104
– $5,776
$10,230
– $8,040
Part 2 of 3
44. The second property under consideration requires an initial investment of $85,000. The
projected operations cash flows from this property are as follows:
•
•
EOY 1 = $2,600
EOY 2 = $4,700
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MiniCram Real Estate Investment Analysis
•
•
EOY 3 = $8,200
Forecasted Sale Proceeds = $105,000
With discount rate of 8.5%, what initial investment is required to get zero Net Present Value
(NPV)?
A.
B.
C.
D.
$85,000
$105,028
$80,435
$95,014
Part 3 of 3
45. The third property under consideration is listed for sale at $435,000. There is no projection
of any operations cash flow from this property. Smart would like to sell it after three years and
expects that his sale proceeds after taxes would be $56,000. If Smart decides to buy this
property for its full listed price and selects a discount rate of 8%, what is the Net Present Value
(NPV) of the property?
A.
B.
C.
D.
$27,160
– $35,828
– $45,228
$41,755
Case Study – 5 Parts
Salesperson Sandy of Cram Realty Inc. is working with investor Danny, who is seriously
considering acquisition of a small retail shopping centre. This property is currently listed for sale
at $1,175,000. Market research shows that the going-in capitalization rate for such properties is
11.5% and the terminal capitalization rate is 12.75%. The subject property has potential income
of $313,925 with a vacancy and credit loss of $15,696. Other income from the property amount
to $10,625. Operating expenses during the first year are estimated to be $189,081.
Based on this information, answer the following 5 questions.
Part 1 of 5
46. Investor Danny is arranging a first mortgage of $870,000 from a local lender who is offering
an interest rate of 7.75% based on 25-year amortization and monthly payments. This loan is
due in 4 years. The lender will also charge an administration fee of $10,150 which are added to
the loan amount. What is the annual debt service for this mortgage loan?
A.
B.
C.
D.
$78,931
$85,664
$62,023
$95,018
Part 2 of 5
47. The applicable taxes on this property are estimated to be $23,560. What will be the Cash on
Cash ratio based on Cash Flow After Tax (CFAT)?
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
A.
B.
C.
D.
6.48%
3.93%
5.67%
8.81%
Part 3 of 5
48. Use the cash flow before tax calculated earlier in this case study. Assume that the cash flow
increases by 7% in each of the following years up to the fourth year. Based on the net operating
income of the fourth year and using the terminal capitalization rate of 9.5%, what is the
estimated value of the property?
A.
B.
C.
D.
$1,423,000
$1,358,000
$1,850,000
$1,196,000
Part 4 of 5
49. Using the calculations performed earlier, what will be the Break-Even Ratio for this property
for EOY1?
A.
B.
C.
D.
76.79%
82.35%
93.28%
86.78%
Part 5 of 5
50. After performing the basic calculations, salesperson Sandy is ready to complete the Sale
Proceeds Cash flow worksheet for her investor client Danny. While Sandy was completing the
worksheet, the issue of Capital Cost Allowance (CCA) and recapture became a part of
discussions. Danny wants to know more about land and building allocation for CCA calculations.
Which of the following is a correct statement in this regard?
A.
B.
C.
D.
The seller normally wants to establish that the building has a greater value than the land.
The land/building allocation is a negotiating issue between the buyer and the seller.
It is always the seller who determines the allocation between land and building values.
The CCA that can be claimed is based on the amount of financing because the security
for the mortgage is the building and not the land.
-----------------Back to Sample Exam 2
Detailed Math Solutions
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MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
QUICK ANSWER KEYS
SAMPLE EXAM 2
1. B
2. A
3. D
4. D
5. B
6. C
7. A
8. B
9. A
10. D
11. C
12. B
13. D
14. C
15. A
16. C
17. D
18. C
19. D
20. B
21. B
22. C
23. A
24. D
25. B
26. C
27. A
28. D
29. C
30. B
31. D
32. B
33. A
34. D
35. C
36. A
37. C
38. D
39. B
40. C
41. B
42. D
43. A
44. D
45. C
46. A
47. C
48. B
49. D
50. B
-----------------Back to Sample Exam 2
Detailed Math Solutions
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MINICRAM NOTES
68
MiniCram Real Estate Investment Analysis
SAMPLE EXAM 3
► NOTE: Take a blank sheet of paper to write your answers. The Quick Answer Keys are
located after the last question. This is followed by Detailed Math Solutions.
1. When developing investment Tools:
A. A pre-packaged tool may be used instead of a rational and systematic classification.
B. Most analysts give preference to taxation matters instead of considering taxation issues.
C. The appraisal theories using capital budgeting and selection of assets can be used for
property analysis.
D. The analysis of returns, break-evens, payback periods and taxation issues cannot be
ignored.
2. The fundamental difference between cash on cash return and the overall rate of return is:
A. The cash on cash return is based on the investor paying all cash for the property but the
overall return is not.
B. The cash on cash return is based on the income after debt service is paid, while the overall
return ignores financing options for the investment.
C. The cash on cash return takes into account the cash proceeds from a sale of the property
but the overall return does not.
D. The overall return takes into account the financing for the property but the cash on cash
return does not.
3. In Time Value of Money (TVM) calculations, the discounting function is used to:
A. Converting a stream of future amounts into present value based on a given rate of interest.
B. Conversion of an interest rate to align with regulatory requirements concerning how
interest is calculated.
C. Calculating a future value based on a stream of equal payments at a given rate of interest.
D. Calculating the regular payment required to amortize a mortgage loan at a given rate of
interest.
4. When making adjustments to the operating expenses, care should be taken that:
A. All amounts are taken on annual or semi-annual basis but never on a monthly basis.
B. Expenses that are done once in five years must be verified with actual invoices.
C. Certain expenses, shown on owner’s actual statements, may not correctly reflect the
actual cost of goods or services.
D. Real estate taxes and insurance costs must not be added to the operating expenses.
5. The Operations Cash Flow Worksheet must provide:
A.
B.
C.
D.
A summary of cash flow for at a minimum of 5 years period of ownership.
Tax liability summary for a maximum of 2 years of operation.
Cash flow before tax and cash flow after tax for one to five years.
The capital gains tax and the amount of recaptured capital cost allowance.
6. The adjusted cost base of an investment property:
A. Does not include any adjustment for cost of sale or legal fees.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
B. Is the price of acquisition the property subject to adjustments permitted under the Income
Tax Act.
C. Do not include soft costs involved in the development phase of construction.
D. Is the actual cost of acquisition of the property.
7. Which of the following is not one of the challenges that real estate registrants face in the field
of investment properties?
A. Significant differences can arise due to goals and cost of capital for different investors.
B. Registrants have to wrestle with irregular cash flows and uncertainty of final selling price
five years in future.
C. The value perspectives are different for the market in general and a typical investor.
D. Discounting cash flows are increasingly becoming acceptable standard for analysis and
comparison.
8. One of the difficulties with IRR calculations is that:
A.
B.
C.
D.
It can provide ambiguous results but no definite solution for a specific investor.
Many properties may generate a positive Net Present Value.
It can compare relative merits of various real estate investments.
It can provide an indication of minimum yield requirements of the investor.
9. Which of the following statements correctly describe the Modified Internal Rate of Return
(MIRR)?
A. It analyzes the Present Value of the positive cash flows and the initial investment to Future
Value.
B. This method of comparison is used if negative to positive cash flow change occurs only
once during calculations.
C. It eliminates the multiple sign change difficulties with IRR calculations while excluding the
possibility of more than one Internal Rate of Return.
D. The MIRR calculations are based on adjustments which utilize safe rates but not
reinvestment rates.
10. Which of the following is a correct statement with respect to yield rate?
A.
B.
C.
D.
Yield rate is essentially the same as a capitalization rate.
Yield rates apply to both discounted cash flows and capitalization.
Yield rates are rarely derived from comparable sales of similar properties.
Yield rates applies only to discounted cash flows but not to capitalization.
11. A sandwich leasehold interest:
A.
B.
C.
D.
May be valued either from tenant’s perspective or from sub-tenant’s perspective.
Refers solely to the tenant’s interest in the property during the term of the lease.
Is calculated from the perspectives of both the landlord and the tenant.
Refers to the landlord’s portion of interest during the term of the lease.
12. Risk analysis of an investment:
A. Depends only on probability analysis involving a single variable or conditional probability.
B. May involve sensitivity analysis wherein an investor examines various financial scenarios
to assess their impact on cash flow yield.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
C. Typically involves risk-adjusted discount rates which are used in various fields of
investment but not used for real estate.
D. Rarely depend on sensitivity analysis of the investment when investors consider real
estate as an option to invest.
13. With respect to some fundamental aspects of comparative analysis, which of the following
statements is/are correct?
1. The terms investment value and market value have distinct meanings for the purpose of
investment analysis.
2. The direct income capitalization method is best described as a dynamic presentation of
cash flows.
3. To get a rough measurement of the risk involved in an investment, the payback period
calculations may be used.
4. Even after a systematic analysis of a particular investment property, the basics of
investment are embedded in certain thumb rules.
5. When performing the break-even ratio calculations, the capital appreciation of the
investment property is taken into account.
A.
B.
C.
D.
Only statements 1, 2 and 5 are correct.
Only statements 2, 3 and 4 are correct.
Only statements 1, 3 and 4 are correct.
Only statements 1 and 3 are correct.
14. The direct capitalization method of analysis provides a static presentation of the property
and is most frequently used in property appraisals. Which of the following is typically not
included in the range of calculations with direct capitalization?
A.
B.
C.
D.
Overall Capitalization rate.
Equity and mortgage capitalization rates.
Terminal and split rate capitalizations.
Operations and sale proceeds cash flow.
15. In a typical mortgage loan, both the term and amortization period are used. Which of the
following is a correct statement with respect to amortization?
A. The Interest Act requires that all Canadian mortgages have equal term and amortization
period for calculation of blended payments.
B. Amortization of loan is used to gradually retire a loan by means of periodic partial
payments of principal and interest.
C. When the term of the loan is lesser than its amortization period, the interest must be
compounded semi-annually.
D. Amortization essentially means that the lender is discounting the future stream of
payments in a present value of the mortgage loan.
16. Which of the following statements correctly describes the purpose of preparing the property
analysis worksheet?
A. The worksheet can be used for analyzing the owner’s actual, stabilizing the owner’s
statements and forecasting.
B. It is only used to portray the actual financial performance based on owner’s financial and
tax statements.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
C. The terminology used in the worksheet are standardized and consistently used methods
of calculations.
D. The worksheet provides a platform to the analysis for reconstructing owner’s statements
but does not provide any forecasting based on investor needs.
17. Investor Sandra is considering purchase of a commercial property for $1,350,000 if she can
get a mortgage loan for $800,000. She will use the balance of the purchase price from her own
resources. Mortgage loans for commercial properties are available at 6% per annum with
monthly payments and 25-year amortization period. The annual potential rental income for the
property is $286,000, with an allowance for vacancy and bad debt of 5%. Other income
amounts to $15,360. Operating expenses are estimated to be 58.5% of Gross Operating
Income.
Based on this information, what is investor Sandra’s estimated modified cash on cash return for
the first year of operation?
A.
B.
C.
D.
8.80%
33.89%
10.49%
12.65%
18. The Capital Cost Allowance (CCA) is a matter of deductible expense when completing the
Operations Cash Flow worksheet. Which of the following statements is correct in this regard?
A. Both land and building qualify for CCA deductions wherein the current market value of the
property is broken up into land and improvements.
B. Land is a natural component of the property and is not considered a depreciable capital
asset.
C. The cost of walkways, parking areas and other similar exterior improvements do not
qualify for CCA deductions.
D. The cost of a newly acquired capital asset is typically kept separate from the
undepreciated capital cost of existing assets in the same category.
19. Taxation is an important aspect of analyzing the Sale Proceeds Cash Flow for an
investment property. Read the following statements in this regard.
1. Gain on sale of a property would likely be considered as taxable of the taxpayer regularly
buys and sells properties.
2. The calculations of tax liability on operations as well as on sale are triggered at the time
of disposition of property.
3. If the investment property is a multi-residential apartment building, it would exempt from
Capital Gains Tax.
4. For most tax purposes, the terms gain and taxable gain are not synonymous and are
treated distinctly.
5. Analysts prefer after tax calculations over before tax calculations because that gives a
clearer picture of the specific investment.
A.
B.
C.
D.
Only statements 1 and 5 are correct.
Only statements 2, 3 and 5 are correct.
Only statements 2 and 4 are correct.
Only statements 1, 3 and 4 are correct.
MINICRAM NOTES
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20. Carefully analyze the following statements with respect to Net Present Value (NPV).
1. When comparing different investment options, NPV does not contemplate differences in
initial investment or length of holding period.
2. If the NPV is negative, it can be concluded that cash flows are not sufficient to attain the
benchmark established by a typical investor.
3. Zero NPV indicates that that cash flows are more than what is required to attain the
benchmark established by a typical investor.
4. NPV refers to the total of all values or benefits accruing to a typical investor discounted by
an appropriate discount rate.
5. Both Present Value and Net Present Value calculations are generated from cash flows
and can either reflect before tax or after-tax position.
Which of the above statements is/are correct?
A.
B.
C.
D.
Only statements 1, 2 and 4 are correct.
Only statements 2, 3 and 5 are correct.
Only statements 1, 2 and 5 are correct.
Only statements 3 and 4 are correct.
21. Salesperson Jenny is working with investor Graham, who has selected two different
properties for comparison. One of these properties requires an initial investment of $120,000
and the other requires $150,000. Jenny is having difficulty in calculation the Internal Rate of
Return (IRR) for these two investment options. Which of the following statements is correct in
this regard?
A. The IRR calculations will not provide helpful comparative analysis based on a lump sum
initial investment.
B. No adjustment would be made for the difference in the amount of initial investment.
C. Both properties must have an identical holding period for accurate comparison.
D. Some accuracy in comparison may be established if adjustments are made for $30,000,
which is the difference in initial investment
22. Investor Smart is comparing the length of time required to return his initial investment from
the following two commercial properties:
•
•
•
Property A: Initial investment of $80,000 with a monthly CFBT of $450.
Property B: Initial investment of $76,000 with a monthly CFBT of $370.
Property C: Initial investment of $65,000 with annual CFBT of $4,000.
Which of the following statements is correct with respect to Payback Period of these three
properties.
A.
B.
C.
D.
Property A has lesser payback period than property C, but more than property B.
Property B has lesser payback period than property A, but more than property C.
Property C has lesser payback period than property B, but more than property A.
Property C has more payback period than property B, but less than property A.
23. Which of the following statements is correct with respect to valuation using discounted cash
flow methods?
A. The risk inherent in a single value estimate lies in assuming that one set of assumptions
is better than a combination of assumptions.
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
B. Both discounted net operating income and equity discount rate result in same value
estimate.
C. The unknowns of the marketplace may provide a clear picture of the investment.
D. Increased emphasis is now being placed on a single value estimate as opposed to a range
of values.
24. Investor Gregory and his partner invested $200,000 on a small retail property. Gregory
promised his partner that approximately 8 years to recover this initial investment. Unfortunately,
things did not turn out as expected.
The first 5 years of operation generated the following revenue:
•
•
•
•
•
Year 1 CFBT = $18,200
Year 2 CFBT = - $3,300
Year 3 CFBT = $17,300
Year 4 CFBT = $23,800
Year 5 CFBT = $32,500
Based on this information, what would be equal monthly payments that Gregory must make to
his friend in the next 3 years to meet his investment objectives?
A.
B.
C.
D.
$2,820.38
$2,540.62
$2,347.35
$3,097.22
25. Salesperson Sandy is attempting to estimate the gross operating income of a commercial
property, which is listed for sale at $1,240,000. The range of gross income multiplier (GIM) she
has derived from market research is between 5.95 and 6.20 based on potential income. The
subject property is ultimately sold for 1,200,000. If the allowance for vacancy and bad debt loss
is 4.5%; what is the range of gross operating income the subject property would produce?
A.
B.
C.
D.
$180,000 to $198,560
$184,838 to $192,605
$204,400 to $236,800
$212,308 to $225,990
26. The gross operating income of a commercial property is $180,000 and has annual operating
expenses of $97,200. Comparable sales in the area indicate a gross income multiplier of 8.25.
Based on this information, what is the estimated market value of the subject property?
A.
B.
C.
D.
$1,227,000
$1,310,000
$1,405,000
$1,485,000
27. An income producing property has annual potential rental income of $274,350 with a
vacancy and credit loss of 4.5%. Other income amounts to $14,750 and the annual operating
expenses are $112,385. If the overall capitalization rate is 10.5% for this property, what is the
estimate of value? Answer may be rounded to nearest $100.
A. $1,127,600
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
B. $1,565,400
C. $1,338,200
D. $1,783,000
28. A commercial building has several rental units currently leased to reputed tenants. All units
generate a base rent of $201,600 annually; which is capitalized at 9.25%. The additional rent
generated from the leased units amounts to $143,280 per year and is capitalized at 12%. Based
on this information, what is the estimate of value of this property?
A.
B.
C.
D.
$3,373,500
$2,579,500
$4,129,500
$3,173,500
29. Jamie Morris, president of Cram Cookies Inc. needs to add two more branches for his
famous chain of bakery stores. The total budget is $50,000 for the new furniture and equipment.
He needs to arrange a loan for 75% of the purchase price. In order to shop for a better deal on
the loan, Jamie contacts the first lender who offers this loan at 7.5% annual interest rate with
monthly payments and based on 8-year amortization.
The second lender is offering the same amount of loan at a more competitive rate of 6% per
annum if the amortization period is extended by increased by 4 years. Based on the total
principal and interest paid during the entire amortization period, which loan would be most costeffective for Jamie and Why?
A. The first loan is not cost-effective because the borrower has to pay a higher interest rate.
B. The second loan is cost-effective because lesser interest is paid during the amortization
period.
C. The loan needs to be broken into two parts, with one half from each lender, in order to pay
a nominal interest.
D. The first loan is cost-effective because lesser interest is paid during the amortization
period.
30. Sumair has a 5-year lease for a 1,800 square feet unit in the North Cram City Mall. Her
business is not doing well, and she wants to sub-let the premises to another tenant. She had
signed the lease when the vacancy rates were high, and her base rent was much lower than the
market rent. She wants salesperson Jenny to calculate the value of her leasehold estate so that
she can take advantage of the sub-lease. The value of this leasehold interest:
A. Is determined by calculating the Present Value of the differential cash flow at an
appropriate discount rate.
B. Refers to the increased value that accrues to the tenant due to the difference between the
contracted rent and the market rent.
C. Is referred to as Leased Fee Estate which is determined by calculating the Present Value
of operations cash flow at an appropriate discount rate.
D. The value of the landlord’s interest as well as the tenant’s interest during the term of the
lease.
31. The net operating income of a building is $128,300 and, based on market research, an
appropriate capitalization rate of 10.50% applies. If the replacement cost of this building is
735,800, what would be the value of land based on the land residual method of calculations?
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
A.
B.
C.
D.
$460,290
$510,300
$486,105
$425,670
32. Investor Brandon is attempting to estimate the value of a small retail plaza which generates
a net operating income of $183,450. Based on sale of comparable properties, the value of the
land is estimated to be $850,000. The subject building has a remaining economic life of 40
years, with 100 years being the total economic life. The discount rate for such properties is 10%
and the recapture rate is 2.5%. Based on building residual method of calculation, what is the
estimated value of the building?
A.
B.
C.
D.
$707,550
$787,600
$792,210
$855,770
33. Investor Bowen purchased a commercial property in 1995 for $750,000. The building/land
allocation at the time of purchase was 50/50. Bowen recently sold the property in 2016 and, at
the time of sale, the Undepreciated Capital Cost for the building was $252,320. The building had
deteriorated badly, and land costs had increased at the time of sale. Bowen sold the property for
$1,550,000 but did not receive any value for the improvements. What would be the Recaptured
Capital Cost Allowance as a result of this sale?
A.
B.
C.
D.
$375,000
$252,320
$122,700
Zero
34. Most businesses, including investment decisions are based on some form of probability
analysis. Real estate investment analysis assumes typical economic conditions when
calculating Present Values (PV) and Internal Rates of Return (IRR). Which of the following
statements is correct in this regard?
1. Feasibility studies rely on predictions concerning best and worst-case scenarios, and the
odds of success or failure.
2. Real estate markets have the ability of smooth and easy analysis and seldom confound the
analysts.
3. Relying on a single variable and joint probability to analyze an investment property gives
conclusive results to analysts.
4. Single variable probability assumes that the real estate market can either be weak or strong
or average, but a combination will not be there.
5. Joint probability assumes that the real estate market may assume that two events can occur
at the same time and these may be dependent or independent.
A.
B.
C.
D.
Only statements 1, 2 and 4 are correct.
Only statements 2, 3 and 4 are correct.
Only statements 1, 4 and 5 are correct.
Only statements 3 and 5 are correct
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35. Investor Sarah is considering an investment property with an initial investment of $60,000.
The projected operations cash flow for the next six years is $5,300. The sale proceeds cash
flow will be $44,500. What is the Net Present Value (NPV) of the investment based on a
discount rate of 8.5%?
A.
B.
C.
D.
– $9,520
$8,775
$9,053
– $7,004
36. A small commercial property requires an initial investment of $32,000. The property is
expected to achieve operations cash flow of $4,150 every year for the next 12 years. What is
the Internal Rate of Return (IRR) for this property?
A.
B.
C.
D.
8.74%
7.56%
9.86%
9.04%
37. Landlord Wilson owns a commercial building, which is currently rented to a tenant. He is
interested to estimate the value of his leased fee interest. The original 10-year lease still has 6
years remaining. The annual net operating income from this building is $42,360. The expected
sale price of the property, forecasted for end of sixth year, is $470,000. The cost of sale at that
point would be $26,500.
Assuming that a discount rate of 11.5% is selected, what would be the value of the leased fee
interest?
A.
B.
C.
D.
$380,907
$422,830
$485,860
$407,458
38. Carefully read and analyze the following statements with respect to valuation.
1. The investment value calculations always begin with reconstructed cash flow worksheet.
2. The market value calculations typically begin with completion of reconstructed cash flow
worksheet.
3. Calculations for both investment value and market value are based on assumptions, which
need not be supported by market data.
4. The expectations and preferences of a specific investor may affect the forecasts and, as
a result, the rate of return is affected.
5. The holding period of a property for both investment value and market value are identical
for a specific investor.
Which of the above statements is/are correct?
A.
B.
C.
D.
Only statements 2, 3 and 5 are correct.
Only statements 2 and 4 are correct.
Only statements 1, 3 and 5 are correct.
Only statements 1, 3 and 4 are correct.
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Case Study – 2 Parts
This case study is based on your knowledge of calculating Net Present Value (NPV) using the
Cash Flow Before Taxes (CFBT).
Part 1 of 2
39. Investor Bright is considering two different investment properties to achieve a minimum
discount rate of 10.5%. The operations and sale proceeds cash flow information are as follows:
Property A
Property B
Initial Investment
$40,000
$50,000
EOY 1 Cash Flow
$4,000
$4,200
EOY 2 Cash Flow
$8,000
$3,880
EOY 3 Cash Flow
10,500
$2,450
Sale Proceeds Cash Flow
$50,000
$64,200
What is the Net Present Value (NPV) of each of these properties based on the expected
discount rate?
A.
B.
C.
D.
$15,012 and $6,377
$10,520 and $16,400
$12,200 and $17,750
$15,910 and $24,330
Part 2 of 2
40. The investor decides to go with Property A because of low initial investment and higher sale
proceeds in the third year. But instead of using 10.5% discount rate, he decides to use 12.5%.
What will be the difference in Net Present Value (NPV) of Property A based on the new discount
rate?
A.
B.
C.
D.
$7,003
$6,390
$5,991
$1,017
Case Study - 2 Parts
A multi-residential property is on sale in the west end of Cram Town. Investor Bright is
interested to acquire this property, demolish it and convert into a commercial building. The
owner collected a total rent of $296,700 during the previous year. In addition to this, he also
collected $35 per month from each of the 23 parking spots rented to tenants. Accordingly, his
statement shows annual revenue and expenses as follows:
Gross Revenue for Previous Year = $306,360
Operating Expenses
Property Taxes
MINICRAM NOTES
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Employee Salaries & Benefits
$20,410
Property Insurance
$7,160
Maintenance and Repairs
$10,380
Utility Bills
$27,825
Advertising Expenses
$2,740
Supplies
$2,350
Landscaping Contract
$1,900
Waste Disposal
$7,835
Total Expenses = $112,600
Net operating Income = 306,360 – 112,600 = $193,760
Information collected from the market is as follows:
•
•
•
•
•
The market rent for 10 one bed-room units is $925 each.
The market rent for 8 two-bedroom units is $1,300 each.
The market rent for 5 three-bedroom units is $1,550 each.
The Vacancy and Credit Loss is 4% of the gross annual potential rental income.
The typical management fees are 2.5% of gross operating income.
Based on this information, answer the following two questions.
Part 1 of 2
41. After making the necessary modifications, what is the annual net operating income of this
property?
A.
B.
C.
D.
$204,488
$249,925
$310,550
$287,838
Part 2 of 2
42. Similar rental buildings in the neighbourhood have sold on the basis of 9.5% capitalization
rate. What is the estimate of value of this property based on this capitalization rate?
A.
B.
C.
D.
$2,890,000
$3,020,400
$1,984,000
$2,152,500
Case Study – 3 Parts
Investor Bright purchased a commercial property in 2006 for $1,350,000. The building/land
allocation at the time of purchase was established at 65/35. Immediately after the purchase,
Bright had to spend $140,000 in renovations. The property was appraised in 2009 for the
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purpose of a mortgage loan for $1,550,000. The CCA rate for this type of building throughout
the years of ownership remained at 4%.
Bright finally sold the property in 2011 for $1,950,000. At that time, the improvement allocation
was estimated at $1,170,000.
Based on this information, answer the following three questions.
Part 1 of 3
43. Over a period of 5 years of ownership, Bright had claimed a total of $116,671 as Capital
Cost Allowance (CCA). With this in mind, was any Capital Cost Allowance recaptured and why?
A. No, because CCA is permitted by Canada Revenue Agency and owners need not worry
about it when they sell any commercial property.
B. Yes, the amount of recaptured CCA would be $116,671 because the building allocation
at the time of sale was much more than it was at the time of purchase.
C. Yes, CCA is a method of tax sheltering but all of the CCA claimed during ownership
must be recaptured at the time of sale.
D. No, because CCA is claimed on entire property value irrespective of the building/land
allocation either at the time of purchase or at the time of sale.
Part 2 of 3
44. At the time of sale, the legal costs amounted to $63,700. In addition to this, the realty
commissions were 5% of the sale price. What was the amount of taxable Capital Gains on sale
of this property?
A.
B.
C.
D.
$186,860
$150,335
$168,100
$149,400
Part 3 of 3
45. Investor Bright sold another commercial property in 2016 for 2,220,000. He had purchase
long time ago and the adjusted cost base at the time of sale amounted to $1,650,000. The cost
of sale, including the legal fees, realty expenses and closing costs was $66,320. The sale of this
property also resulted in a recapture of CCA in the amount of $58,245.
If Bright’s marginal tax rate was 40.5%, what was the tax liability on this sale?
A.
B.
C.
D.
$125,584.43
$310,085.58
$158,542.20
$105,336.95
Case Study – 5 Parts
This case study is based on your knowledge of Real Estate Investment Analysis and completion
of Operations Cash Flow and Sale Proceeds Cash Flow worksheets. Salesperson Jenny of
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Cram Realty Inc. is helping investor Burges in his decision to purchase a commercial property.
Help salesperson with the following calculations.
The property under consideration is listed for $920,000 with another $23,500 for the acquisition
costs. Burges will use 30% of the total purchase price as down payment and the balance will be
financed through a local lender. Mortgage loan is available at an annual interest rate of 6.25%
for a 5-year term, with monthly payments and 25-year amortization period.
Help Jenny by answering the following three questions.
Part 1 of 5
46. Cash flow from an investment property comes from operation or from sale proceeds. Which
of the following statements is correct in this regard?
A. The best measure of operations cash flow is the cash flow before taxes.
B. The marginal tax rate of a specific investor can impact the sale proceeds cash flow.
C. When completing the operations cash flow worksheet, the acquisition price does not
include the amount of mortgage loan.
D. The amount of cash flow is more important to investors instead of time when it is received.
Part 2 of 5
47. Salesperson Jenny needs to complete the Operations Cash Flow worksheet for a 5-year
period. What amount would you use for the Annual Debt Service for the 5th year when
completing the worksheet?
A.
B.
C.
D.
$38,983
$55,589
$51,891
$64,547
Part 3 of 5
48. Jenny needs to perform some basic calculations with respect to Capital Cost Allowance
(CCA). She needs help with some basic information in this regard. Which of the following
statements is correct regarding CCA?
A. The disposition of a depreciable capital property always involves recapture of all or part of
CCA that has been claimed over the years of ownership.
B. The claim for a Capital Cost Allowance (CCA) for depreciation of a capital asset is
permitted only for property owners and not for tenants.
C. It is completely up to the property owner to decide the class of asset in which they want to
claim CCA.
D. CCA that can be claimed in any taxation year depends on the class of the capital asset.
Part 4 of 5
49. The building/land ratio at the time of purchase was 60/40. The property falls in Class 1 and a
CCA rate of 4% applies. Using the Declining Balance method of calculation, and keeping in
mind the rate for the acquisition year, what would be the amount for the Capital Cost Allowance
(CCA) for Year 1 and 2 respectively?
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MiniCram Real Estate Investment Analysis
A.
B.
C.
D.
$11,322.00 and $22,191.12
$22,542.30 and 29,245.67
$22,542.30 and 41,024.46
$18,654.40 and 32,330.90
Part 5 of 5
50. After completing the Operations Cash Flow Worksheet for investor Burges, salesperson
Jenny has determined that the cash flow before taxes for the first year would be $32,460. This is
expected to increase by 5% every year up to year 5. The projected sale price of the property
after 5 years of ownership would result in sale proceeds of $380,000.
Based on the initial investment made by investor Burges at the time of purchase and the
revenues, and using a 10% discount rate, what would be the Net Present Value (NPV) of the
investment?
A.
B.
C.
D.
– $132,784
$87,628
– $51,680
$35,040
-----------------Back to Sample Exam 3
Detailed Math Solutions
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MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
QUICK ANSWER KEYS
SAMPLE EXAM 3
1. D
2. B
3. A
4. C
5. C
6. B
7. D
8. A
9. C
10. D
11. A
12. B
13. C
14. D
15. B
16. A
17. C
18. B
19. A
20. C
21. D
22. C
23. A
24. D
25. B
26. D
27. B
28. A
29. D
30. A
31. C
32. B
33. D
34. C
35. A
36. B
37. D
38. B
39. A
40. C
41. A
42. D
43. B
44. D
45. A
46. B
47. C
48. D
49. A
50. B
-----------------Back to Sample Exam 3
Detailed Math Solutions
Back to Table of Contents
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
SAMPLE EXAM 4
► NOTE: Take a blank sheet of paper to write your answers. The Quick Answer Keys are
located after the last question. This is followed by Detailed Math Solutions.
1. Real estate analysts typically use static and dynamic indicators for their analysis. The
difference between these two methods is that:
A. Static methods are applied to one community only, but dynamic analysis is national in
scope and analyzes macro-economic statistics.
B. Static analysis focuses on financial information at one point in time while dynamic methods
analyze financial performance over a projected holding period and usually include
proceeds from the ultimate disposition of the property.
C. Dynamic analysis is based on past performance of an investment, while static analysis
relies on the projected future performance of the investment.
D. Static analysis is an analysis of various financing alternatives and dynamic analysis is an
estimate of value based on the application of an Overall Capitalization Rate (OCR).
2. How can an Overall Capitalization Rate (OCR) be developed from an equity capitalization
rate?
A. It can't, because there is no relationship between the two rates.
B. It can be used for a rough estimate of the overall rate, as the equity rate is generally 3%
more than the overall rate.
C. It can be used when applying the building/land ratio to construct the overall rate.
D. It can be combined with the mortgage constant based on the ratio of mortgage amount vs.
equity.
3. A partially amortized mortgage:
A.
B.
C.
D.
Means that the mortgage loan where the term and amortization period are identical.
Is mandatory for all mortgages for an amortization period of less than five years.
Refers to a mortgage loan where the term and amortization period are not identical.
Requires that a future amount be converted into present value.
4. In reconstruction of the operating statement provided by the owner:
A. Depreciation of the building is considered as a valid operating expense for valuation
purposes.
B. Typical property management fees are added to the operating expenses even though the
owner himself is managing the property.
C. Vacancy rate is always applied to the annual gross potential rental income without any
regard to additional income.
D. Investors would typically be interested in a property with larger gross operating income
without considering the net operating income.
5. The Operational Cash Flow calculations:
A. Are combined with Sale Proceeds Cash Flow calculations to calculate the Internal Rate of
Return (IRR).
B. Not related to the Sale Proceeds Cash Flow because sale of property is a future event.
C. Consider the mortgage loan fees as only if they are amortized over less than five-year
period.
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MiniCram Real Estate Investment Analysis
D. Provide the investor with actual cash flow available without deducting the tax liability.
6. Which of the following statements is correct with respect to recapture of Capital Cost
Allowance (CCA)?
A. Recapture of all or partial CCA deductions occurs if the improvement allocation is more
than 50% of the purchase price.
B. The building and land allocation at the time of purchase and at the time of sale must be
equal.
C. Recapture occurs if CCA deductions exceed the actual decline in value of the depreciable
property.
D. Recapture occurs if the decline in value of the depreciable property is more than the CCA
deductions.
7. The Net Present Value (NPV):
A. Indicates a profitable investment if it is negative in relation to the discount rate.
B. Is intended as a comparative technique instead of a technique to analyze individual
properties.
C. Provides a method of ranking investment options by applying a discount rate to Present
Value.
D. Is frequently used in conjunction with Internal Rate of Return (IRR) as a measure of
profitability.
8. The Internal Rate of Return (IRR) has proven to be a valuable tool for analysis when:
A. Each property selected for comparison is treated in an identical manner for screening
purposes.
B. It indicates that a specific property meets the investor’s financial objectives.
C. Both internal and external factors are considered during analysis and calculations.
D. The investor is not much concerned about reinvestment options with surplus cash.
9. The Present Value (PV) calculations using the discounted net operating income:
A.
B.
C.
D.
Utilizes a yield rate based on mathematical average of capital.
Must rely on net operating income from the owner’s statements.
Must utilize a yield rate based on weighted average cost of capital.
Must use distinct discount rates for both equity and debt components.
10. When performing Net Present Value (NPV) calculations, the registrants:
A.
B.
C.
D.
May face a difficulty when the tax position of the investor is available for analysis.
Must use caution when the acquisition involves complex taxation issues.
May use tax liability of a common investor, provided the client is fully informed.
The most desirable point of analysis is where the profits intersect with zero NPV.
11. Which of the following statements is correct with respect to base rent for a commercial
property?
A.
B.
C.
D.
It represents the per square foot rent including the operating expenses.
It is the same as the net effective rent quoted in the lease document.
It is same for every tenant in the building irrespective of the lease term.
It is based on the rentable area occupied by a particular tenant.
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12. In sensitivity analysis:
A. For a rental property, an increase in utility costs have greater impact on cash flows than
the vacancy rates existing in the market.
B. Only worst-case profiling is undertaken which involves individual factors and their impact
on returns.
C. The greater the strength of the sensitivity between a variable and its outcome, the greater
is the caution that needs to be exercised.
D. The marginal tax rate for an individual investor has normally lower sensitivity than changes
in the net operating income.
13. Estimating the market value as well as the investment value has added a new dimension to
comparative analysis of investment properties. Which of the following statements is correct in
this regard?
A. Investment value considers the relative worth of specific properties from the perspective
of an individual investor, his objectives and goals.
B. Investors typically emphasize the suitability of an investment project only based on the
expected return on investment.
C. When it comes to decision making, both investment value and market value are often
equal.
D. The focus of market value is for an individual investor while the focus of investment value
is for a typical investor.
14. Salesperson Jenny has found a retail plaza for her investor client Randell. This strip plaza
has 15 small-sized units having 1,200 square feet each. The two end units are larger having
1,600 and 1,850 square feet. The current rent is $15.75 per square foot for the smaller units and
$14.50 per square foot for the larger units. The vacancy and credit loss for this type of building
is 6% of the potential rental income. Annual operating expenses are estimated to be 48% of the
gross operating income. The required initial investment is $930,000 and the annual mortgage
payment are estimated to be $50,400. Based on this information, what is the Cash on Cash
ratio for this property?
A.
B.
C.
D.
9.82%
10.50%
12.11%
8.39%
15. Sarah is considering putting in her extra dollars in investment business. Her main concern is
the time period it will take to get her investment back. She is considering the following two
options.
•
•
Property 1: The Cash Flow Before Taxes is $5,450 with an initial investment of $62,000.
Property 2: The Cash Flow Before Taxes is $5,200 with an initial investment of $55,000.
What is the difference in Payback Period for these two investment options? Round your answer
to nearest years and months.
A.
B.
C.
D.
2.73 years
1.26 years
1.61 years
0.80 years
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16. Investor Smart made an investment for 40% interest in his friend’s computer business as a
limited partner. He was expecting that his initial investment of $250,000 would be repaid in 8
years. The Cash Flow Before Taxes (CFBT) for the first five years was as follows:
Year 1
$10,250
Year 2
$17,000
Year 3
$24,500
Year 3
$5,500
Year 5
$42,000
What would be the monthly payments that Smart should receive in the remaining 3 years to
meet his investment objectives?
A.
B.
C.
D.
$4,187.50
$3,107.30
$3,320.47
$4,410.28
17. Five years ago, Kimberly invested $125,000 in her friend’s furniture business with
expectations that she would get a reasonable return on her investment. In the first 3 years, her
investment generated a cash flow of $1,350 per month. After that, the things started getting bad
for the business due to competition from a large furniture store in a nearby shopping centre.
Kimberly agreed to reduce her monthly payments to $1,150. How much longer will it take until
her initial investment is repaid?
A.
B.
C.
D.
8 years
5.6 years
9.3 years
3.8 years
18. Cram City Holdings Inc. is interested in acquiring a small commercial property but the
decision rests on initial screening of the cash flow projections and break-even ratio. The
following information is available for the property under consideration.
•
•
•
•
•
•
Annual Potential Rental Income: $382,435.
Vacancy and Credit Loss: 3.5% of the Potential Rental Income.
Additional Income: $25,560.
Monthly Payment for 1st Mortgage: $2,280.60
Monthly Payment for 2nd Mortgage: $3,647.75
Annual Operating Expenses: 62% of Gross Operating Income
What is the Break-Even ratio for this property?
A.
B.
C.
D.
93.56%
89.02%
84.37%
80.20%
19. The capitalization methods used for property analysis may use several types of rates. In this
regard, which of the following statements is correct?
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A. The overall rate of return for an investment property includes the rate ON return but not
the rate OF return.
B. The rate used in direct capitalization is commonly referred to as overall capitalization rate.
C. The equity capitalization rate reflects the relationship between net operating income and
the purchase price.
D. When only a few comparable properties are available, the direct capitalization rate is very
effective in analysis of the subject property.
20. Which of the following statements is correct with respect to capitalization rate?
A. A small upward or downward change in the capitalization rate can have a dramatic impact
on the value of a property.
B. Capitalization rates can affect the investment decisions as they are more accurate than
internal rates of return.
C. Most investors depend on the forecasted operations cash flow from an income producing
property instead of discounted cash flow.
D. When estimating an overall capitalization rate from the market, the analysts typically select
diverse properties for comparison.
21. Which of the following statements correctly describes the compounding function in Time
Value of Money (TVM) calculations?
A. Calculating the payment required to amortize a specific loan amount at a given rate of
interest.
B. Calculating the present value of a series of future equal payments made over time at a
given rate of interest.
C. Determining the amount resulting from a stream of equal deposits over a given period of
time plus a given rate of interest.
D. Discounting a future income stream into a present value.
22. Cram City holdings Inc. is considering acquisition of a commercial property, which is listed
for $650,000. The owner’s financial statements indicate that the Effective Gross Income (EGI) of
this building is $146,760. Cram City Holdings Inc. believes in proper screening of the subject
property and comparable sales before making the final decision.
The following data is available from sales of similar properties in the area.
Comparable
Sale Price
EGI
Operating Expenses
Sale #1
$575,800
$140,784
$68,730
Sale #2
$615,500
$148,825
$68,027
Sale #3
$664,300
$161,647
$74,610
Based on the above comparable sales, estimate the Gross Income Multiplier (GIM) in the
subject market. Based on selected GIM, what would be the reasonable value of the property
under consideration (rounded to nearest $1000)?
A. $628,000
B. $619,000
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MiniCram Real Estate Investment Analysis
C. $612,000
D. $605,000
23. The existing overall capitalization rate for a commercial rental building is 10.5%. The
building currently generates an annual net operating income of $336,783. Approximately 72% of
the net operating income is generated from the base rent and the balance from percentage rent.
Market research indicates that the capitalization rates for base rent and percentage rent are
9.75% and 13.5% respectively. Based on this data, what is the estimate of value for the property
using the split rates?
A.
B.
C.
D.
$3,207,457
$3,185,526
$3,432,480
$3,365,845
24. The Property Analysis Worksheet can be used to reconstruct owner’s income and expenses
statement to reflect a typical property type. Which of the following is a correct when preparing
forecast scenarios based on investor’s objectives?
1. The owner may have deferred repairs and maintenance and it may impact the expenses
for the investor in future.
2. Long-range tax assessments and mill rate charges usually do not affect the property
performance and may be ignored.
3. High vacancy rates in future due to competition or tenants leaving the building must be
considered in income forecasting.
4. The class of building under analysis, its amenities and its physical condition usually do not
affect the forecasted income in a stable rental market.
5. The existing insurance coverage may not be sufficient, and the investor may have to
arrange additional coverage and that may increase the expenses.
A.
B.
C.
D.
Only statements 1, 3 and 5 are correct.
Only statements 2, 3 and 5 are correct.
Only statements 3 and 5 are correct.
Only statements 1, 2 and 4 are correct.
25. Which of the following statements is correct with respect to the Operations Cash Flow
Worksheet and associated taxation matters?
A. This worksheet can be used to accurately calculate the tax liability on sale of the
investment property.
B. Since tax liability is usually known, real estate registrants can use the pre-determined
percentages for calculations.
C. Most investors are interested in analysis of the operations cash low and focus on before
tax calculations.
D. The marginal tax rates used for calculations depend on operational income as well as on
the income realized upon disposition.
26. Investor Thompson is considering acquisition of a commercial property for $2,250,000. He
would be making an initial investment of $850,000 and getting a mortgage loan for the balance
amount. Mortgages for this type of properties are currently available at 6.75% per annum,
compounded semi-annually not in advance and based on a 5-year term and 25-year
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amortization period. If the monthly payment for the said mortgage amounts to $9,590.69; what
would be the mortgage capitalization rate?
A.
B.
C.
D.
8.22%
7.28%
6.95%
5.76%
27. Various factors are considered in determining whether the profit from sale of an asset is
regular business income or capital gain. Which of the following is not one of these factors?
A.
B.
C.
D.
Frequency of similar transactions.
Relationship of these transactions to taxpayer’s business.
General intention of the taxpayer at the time of purchase.
The total taxable income for the taxation year.
28. Investor Brian wants salesperson Jenny to compare three properties. Jenny knows that she
must perform certain calculations to help Brian take a decision for acquiring one of these
properties. Which of the following statements is correct with respect to property analysis using
IRR calculations?
A. If the sum of future periodic cash flows is less than the initial investment, then the IRR will
be more than zero.
B. If only the initial investment is returned by way of periodic cash flows during the holding
period, then the IRR will be less than zero.
C. If the sum of future periodic cash flows is greater than the initial investment, then the IRR
will be greater than zero.
D. Since IRR calculations will provide only ambiguous results, Jenny should focus only on
snapshot of properties using cash on cash and direct capitalization.
29. Cram City Holdings Inc. is considering purchase of a commercial property with an overall
capitalization rate of 9.5%. The forecasted net operating income for the first year of operation is
$62,100, which is expected to increase by 1% every year for the five-year holding period. The
existing risk factor for these types of properties is 1.5%. What is the projected reversionary
value of this property based on the fifth-year net operating income and using both the overall
capitalization rate and the risk factor.
A.
B.
C.
D.
$587,468
$680,226
$657,203
$543,274
30. Durable Investments Inc. is interested to purchase a condominium apartment building,
which needs extensive renovations. It is estimated that the future cost of required renovations in
the next six years would be $340,000. The company wants to establish a sinking fund for this
purpose and setup monthly payments in an investment fund. The fund would earn an annual
interest rate of 5.5%, compounded monthly. What is the amount of monthly payment to achieve
a target of $340,000 in five years?
A.
B.
C.
D.
$3,745.60
$3,996.55
$4,136.82
$2,892.38
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
31. The commercial real estate market is active due to low mortgage interest rates and investor
Sharad wants to purchase a small investment property. He needs a mortgage loan of $750,000
for which the lender has offered him 6.25% interest rate, compounded semi-annually not in
advance, amortized over a period of 20 years. If the term of the mortgage is five years, how
much total interest he will have to pay during the term?
A.
B.
C.
D.
$210,327.87
$199,074.52
$219,529.30
$215,351.73
32. Cram City is growing and the real estate business for Cram Realty Inc. is also expanding.
The company has hired 15 new salespersons and is opening a branch office in the east end of
the town. They need new equipment and furniture for the branch office. Cram Realty has
sufficient funds for the purchase, but they want to keep their reserves and obtain a loan of
$34,500. A well-known lender in the town has made two offers to the brokerage for this loan.
•
•
The first offer is at 8.5% interest amortized over 10-year period.
The second offer is at 8% interest amortized over 8-year period.
If both loans have identical terms of 5 years and the payments are made monthly, what would
be the difference in principal paid during the term?
A.
B.
C.
D.
$4,934.38
$5,268.05
$2,813.40
$7,715.26
33. Which of the following statements is correct with respect to valuation techniques used for
investment properties?
A. When discounted net operating income method is used, a yield rate based on weighted
cost of capital is utilized.
B. All valuation techniques essentially flow from the income and cost approach to value.
C. Valuation techniques must utilize the sale proceeds before and after-tax cash flow.
D. To arrive at a single point value using discounted cash flow, the appraiser must not use
any assumptions.
34. Investor Graham sold one of his commercial properties for $1,230,000. The property had an
outstanding mortgage balance of $527,438 at the time of sale. The total cost of sale was 64,570
and Graham’s tax liability amounted to $138,375. What was the amount of Sale Proceeds After
Taxes?
A.
B.
C.
D.
$637,992
$698,324
$503,498
$499,617
35. Brandon purchased a commercial property for investment four years ago. He arranged a
mortgage loan of $843,750 at 7.75% interest, amortized over 25 years and due in 5 years. The
mortgage payments are done monthly. In the 4th year, the property generated Net Operating
Income (NOI) of $172,204 and its Cash Flow Before Taxes (CFBT) was $93,362. He sells the
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
property with a Terminal Cap Rate of 10.75%, which applies to the fourth year. The total cost of
sale was $119,045. Based on this information, what is the amount of Sale Proceeds Before
Taxes?
A.
B.
C.
D.
$420,830
$556,326
$691,796
$723,306
36. Carefully read and analyze the following statements with respect to leasing cost analysis.
1. Lease cost analysis may become complex with long-term leases as compared to shortterm leases.
2. The actual cost of occupancy for the renter typically excludes the items that do not
traditionally viewed as leasing costs.
3. Lease cost analysis must use only the rentable area of the tenant because this area is
used to calculate the rent and additional rent.
4. Calculations apply a discount rate to the cash flows in recognition of the time value of
money.
5. The calculations in the lease cash flow worksheet include both the base rent and the
additional rent during the term of the lease.
Which of the above statements is/are correct?
A.
B.
C.
D.
Only statements 1, 2 and 4 are correct.
Only statements 1, 4 and 5 are correct.
Only statements 2, 3 and 5 are correct.
Only statements 1 and 5 are correct.
37. Tenant Fisherman has a land lease for a term of 8 years with the Cram Region
Conservation Authority. The authority does not permit Fisherman to sublet the land. Fisherman
is paying $550 per month for the land lease but the current market rent for this type of land
lease is $700 per month.
Assuming that the land lease could be assigned, what would be the estimated value to the
leasehold interest based on a 14% discount rate?
A.
B.
C.
D.
$9,845
$8,350
$5,050
$6,400
38. Probability is a numerical measure of the likelihood of an event will occur during the period
of ownership. Which of the following statements is not correct in this regard?
A. Probability values are assigned on a scale from 0 to 1 and the outcome may be a single
event with a range of possible events.
B. A probability near 0 means that an event is very unlikely to occur and 1 means that an
event is almost certain to occur.
C. In the event of unavailability of historical data for analysis, a subjective approach may be
used for assigning probabilities.
D. Conditional probability refers to the likelihood of an event given that another event has
occurred.
MINICRAM NOTES
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Case Study – 2 Parts
Investor Richard owns a commercial building, which earned a net operating income of $228,375
in the current taxation year. He had arranged a mortgage loan of $935,500 at 7.5% interest rate
for a term of 5 years. The mortgage payments are monthly, and the amortization period is 25
years. The loan fee was $16,080, which needs to be amortized over the five-year period. The
Undepreciated Capital Cost (UCC) in the beginning of the year was $812,328 and the building
falls in 4% CCA class.
Part 1 of 2
39. Assuming that Richard did not make any acquisitions or dispositions in the same class in the
taxation year, what would be the amount of Undepreciated Capital Cost (UCC) of the building at
the end of the taxation year (rounded to nearest dollar)?
A.
B.
C.
D.
$609,817
$470,026
$526,385
$779,835
Part 2 of 2
40. Complete the Operations Cash Flow Worksheet given below.
7.
= Net Operating Income
8.
- Non-Operating Expenses
9.
- Interest on 1st Mortgage
10.
- Interest on 2nd Mortgage
11.
- Amortization of Loan Fees
14.
15.
16.
= Income Before CCA
- CCA
= Taxable Real Estate Income
What is the amount of Real Estate Taxable Income for the first year of operation.
A.
B.
C.
D.
$120,860
$124,026
$118,020
$132,580
Case Study – 2 Parts
Salesperson Jenny of Cram Realty Inc. is approached by owner/investor Hawkins to list his 24unit apartment building at 126 Square Street. Mr. Hawkins is interested in liquidating the assets
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
of this building and buy a larger parcel of land for a new high-rise apartment building. The
building has 16 one-bedroom units and 8 two-bedroom units. The market rent per month for
similar units is $900 and $1,050 respectively. Every unit owner pays $25 per month as laundry
charges. The applicable vacancy and credit loss is 3% of all income.
Based on this information, answer the following two questions.
Part 1 of 2
41. What is the Gross Operating Income of the property?
A.
B.
C.
D.
$272,376
$280,592
$198,203
$272,376
Part 2 of 2
42. According to owner’s financial statements, the annual operating expenses for the property
are as follows:
Property Tax
$21,670
Insurance
$12,340
Water, Hydro and Gas
$13,200
Minor Repairs and Maintenance
$13,460
Landscaping Contract
$6,350
On-site Janitor’s Salary
$35,600
Supplies
$1,800
If Jenny decides to use a capitalization rate of 10.5%, what would be the estimated value of the
property (rounded to nearest $1000)?
A.
B.
C.
D.
$1,450,000
$1,720,000
$1,600,000
$1,268,000
Case Study – 3 Parts
This case study is based on your knowledge of theoretical and mathematical fundamentals of
real estate investment analysis. Salesperson Jenny, a salesperson with Cram Realty Inc.
specializes in commercial and investment properties. She is currently working with three
investor clients of the brokerage- Ronny Borg, Alexander Coletti and Carmen Montoya.
Carefully read each question and select the best option.
Part 1 of 3
43. Investor Ronny wants to make an initial investment of $675,000 to buy a commercial
building. In the five years of ownership, the property is expected to generate a consistent cash
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
flow of $7,500 every year. The forecasted sale price of the property at the time of purchase was
$850,000. If Ronny had required a discount rate of 8.5% on the investment, what would be the
Net Present Value (NPV) of this property?
A.
B.
C.
D.
$32,430.26
$37,094.88
$43,328.57
$47,264.50
Part 2 of 3
44. Investor Alexander is seriously contemplating partnering with his builder friend who needs
an initial investment of $90,000 from him. The builder friend, who has asked several other
investors to invest in his upcoming venture, promises a minimum return of $8,500 every year in
the next 7 years. Besides this, he promises a guaranteed amount of $175,000 in the 8th year.
Based on this information, what Internal Rate of Return (IRR) would be realized by Alexander?
A.
B.
C.
D.
16.06%
15.73%
18.35%
14.70%
Part 3 of 3
45. Investor Carmen Montoya is a first-time investor. He has a few questions for Jenny, for
which he wants satisfactory answers, before he can decide to invest his hard-earned dollars.
The most basic question is about return and rates of return. Carmen wants to know how much
and when his investment will pay him back. Jenny makes the following statements to address
his concerns.
1. The rate of return of the investment is called recapture rate and it is an essential component
of the overall capitalization rate.
2. The discount rate is also a part of the overall capitalization rate and it indicates the holding
period for a reversion of the initial investment.
3. The Overall Capitalization Rate (OCR) is actually the Internal Rate of Return (IRR), which
does not involve any ambiguities.
4. In the Overall Capitalization Rate (OCR), we take care of both the return on investment as
well as the return of investment.
5. The rate on return on the initial investment is known as discount rate which only apply to
after-tax cash flows.
Which of the statements given by Jenny are correct?
A.
B.
C.
D.
Only statements 1, 2 and 4 are correct.
Only statements 2, 3 and 5 are correct.
Only statements 1 and 4 are correct.
Only statements 2, 3 and 5 are correct.
Case Study – 5 Parts
This case study deals with your knowledge of property analysis, estimates of value and cash
flow analysis. Salesperson Jenny of Cram Realty Inc. has been asked to list a retail complex
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
located at 26 Square Avenue located in the east end of Cram City. The owner Mr. James
Mansfield is interested in selling the complex and has provided the current financial statements
to Jenny. Jenny is required to reconstruct the operating statement to reflect the market
conditions.
Answer the following five questions based on the information provided above and in each
question.
Part 1 of 5
46. The owner’s actual operating statement shows the net operating income of the retail
complex is $301,292 after deducting the operating expenses of $148,420. The property
currently has a fully open mortgage loan of $1,750,000 at 10.5% interest, amortized over 15
years.
Based on the owner’s actual operating statement, what is the Cash Flow Before Taxes (CFBT)
for the property?
A.
B.
C.
D.
$43,663
$81,578
$57,196
$72,047
Part 2 of 5
47. Similar mortgage loans are currently available at 8.5% for 25-year amortization or at 8% for
20-year amortization. With these financing options, and using the owner’s Net Operating Income
figure, what will be the difference in Cash Flow Before Taxes?
A.
B.
C.
D.
$2,087
$6,929
$5,224
$8,673
Part 3 of 5
48. Based on the difference in Cash Flow Before Taxes, assume that the owner selects the first
option with 8.5% interest amortized over 25-years. Which of the following statements is not
correct in this regard?
A. The repayment of loan would be accelerated but at the cost of refinancing costs.
B. If the owner’s immediate priority is only to generate a larger cash flow, then the selected
option is better.
C. The decision to switch mortgage cannot be taken merely on the basis owner’s operating
statement.
D. Even if the owner selects the option with 8% interest with 20-year amortization, the decision
would be acceptable.
Part 4 of 5
49. Mr. James admits that his main problem is cash flows from the complex. Jenny found
several discrepancies in the owner’s actual statement and wanted to reconstruct according to
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MiniCram Real Estate Investment Analysis
current market conditions. After making necessary modifications, Jenny finds that the Gross
Operating Income from the retail complex should be $566,365 and the modified operating
expenses should be $195,970.
Jenny finds a buyer who is willing to pay $2,450,000 for the property. The buyer uses a
capitalization rate of 11.5% for the purchase. He assumed the existing mortgage of $1,750,000
and gets a mortgage loan at 8.5% interest amortized over 25 years. What is the modified Cash
on Cash ratio for the buyer?
A.
B.
C.
D.
10.73%
13.47%
16.39%
14.56%
Part 5 of 5
50. Based on the calculations performed in earlier parts of this case study, what will be the
payback period for the buyer?
A.
B.
C.
D.
8.5 years
7.8 years
5.5 years
6.1 years
-----------------Back to Sample Exam 4
Detailed Math Solutions
Back to Table of Contents
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
QUICK ANSWER KEYS
SAMPLE EXAM 4
1. B
2. D
3. C
4. B
5. A
6. C
7. D
8. B
9. C
10. B
11. D
12. C
13. A
14. C
15. D
16. A
17. B
18. D
19. B
20. A
21. C
22. D
23. B
24. A
25. D
26. A
27. D
28. C
29. A
30. B
31. D
32. B
33. A
34. D
35. C
36. B
37. B
38. C
39. D
40. B
41. A
42. C
43. B
44. A
45. C
46. D
47. B
48. A
49. C
50. D
-----------------Back to Sample Exam 4
Detailed Math Solutions
Back to Table of Contents
MINICRAM NOTES
98
MiniCram Real Estate Investment Analysis
PART V - DETAILED MATH SOLUTIONS
SAMPLE EXAM 1
25. D. 17.84%
Annual Potential Rental Income = $547,500
Vacancy and Bad Debt = 547,500 X 5.5% = $30,113
Effective Rental Income = 547,500 – 30,113 = $517,387
Other Income = 1,680 X 12 = $20,160
Annual Gross Operating Income = 517,387 + 20,160 = $537,547
Operating Expenses = $316,700
Net Operating Income = 537,547 – 316,700 = $220,847
Mortgage Loan = 2,400,000 X 70% = $1,680,000
Initial Investment = 2,400,000 X 30% = $720,000
Annual Debt Service (Annual Interest on Mortgage) = 1,680,000 X 5.5% = $92,400
Cash Flow Before Taxes = 220,847 – 92,400 = $128,447
Cash on Cash = 128,447 ÷ 720,000 X 100 = 17.84%
26. B. 83.52%
Annual Potential Rental Income = $1,040,000
Vacancy and Bad Debt = 1,040,000 X 5.5% = $57,200
Effective Rental Income = 1,040,000 – 57,200 = $982,800
Other Income = $16,400
Annual Gross Operating Income = 982,800 + 16,400 = $999,200
Operating Expenses = 999,200 X 53.5% = $534,572
Net Operating Income = 999,200 – 534,572= $464,628
Annual Debt Service (Annual Interest on Mortgage) = 25,000 X 12 = $300,000
►Break Even Ratio = (Operating Expenses + Annual Debt Service) ÷ Gross Operating
Income
= (534,572 + 300,000) ÷ 999,200 X 100 = 83.52%
27. D. 13.59 Years
Potential Rental Income = $792,000
Effective Rental Income = 792,000 – 4.5% = $756,360
Gross Operating Income = 756,360 + 16,000 = $772,360
Net Operating Income: $772,360 – 47% = $409,350
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
Mortgage Loan = 5,500,000 X 60% = $3,300,000
Initial Investment = 5,500,000 X 40% = $2,200,000
Calculate Monthly Mortgage Payment & Annual Debt Service with HP Calculator
SHIFT C ALL
5.75 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
3300000 PV
25 SHIFT xP/YR
PMT
Monthly Payment = $20,625.73
Annual Debt Service = 20,625.73 X 12 = $247,508
Cash Flow Before Taxes = 409,350 – 247,508= $161,842
Payback Period = 2,200,000 ÷ 161,842 = 13.59 Years.
28. C. $954,000.
Estimate GIM from Comparable Sales
►GIM = Sale Price ÷ Gross Operating Income
Sale 1
Gross Operating Income = $121,800 – 4% = $116,928
GIM = 950,000 ÷ 116,928 = 8.12
Sale 2
Gross Operating Income = 114,840 – 3.5% = $110,821
GIM = 906,500 ÷ 110,821 = 8.18
Sale 3
Gross Operating Income = 112,230 – 4% = $107,740
GIM = 879,000 ÷ 107,740 = 8.16
The range of GIM from above sales is from 8.12 to 8.16
A reasonable GIM of 8.14 can be used to estimate the value of the subject property.
Estimate of Value = 117,200 X 8.14 = $954,008 Rounded to $954,000.
29. B. $242,900 and $246,900
Value Based on Overall Capitalization Rate = 27,200 ÷ 11.2%
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
= $242,857 Rounded to $242,900.
Value Based on Equity Capitalization Rate
Value of Equity = 9,150 ÷ 14.8% = $61,824
Present Value of Mortgage = $185,000
Estimate of Value = 61,824 + 185,000
= $246,824 Rounded to $246,900
30. A. 16.71%
Equity Amount = 530,000 – 280,000 = $250,000
Calculate Monthly Payment with HP Calculator
SHIFT C ALL
6.75 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
280000 PV
25 SHIFT xP/YR
PMT
Monthly Payment = $1,918.14
Annual Debt Service = 1,918.14X 12 = $23,017.68
Cash Flow Before Taxes = 64,800 – 23,017.68 = $41,782 (Rounded)
Equity Capitalization Rate = 41,782 ÷ 250,000 X 100 = 16.71%
31. B. $3,704.17
Total Cash Flow Before Tax in 4 Years
= (4,500 + 16,800 – 2,700 + 12,500) = $31,100
Balance Amount = 120,000 – 31,100 = $88,900
Monthly Payments During Fifth and Sixth Year (2 years)
= 88,900 ÷ 24 = $3,704.17
32. C. 8.04%
Calculate Monthly Payment with HP Calculator
SHIFT C ALL
6.5 SHIFT NOM%
2 SHIFT P/YR
MINICRAM NOTES
101
MiniCram Real Estate Investment Analysis
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
1500000 PV
25 SHIFT xP/YR
PMT
Monthly Payment = $10,047.36
Annual Debt Service = 10,047 X 12 = $120,564
Mortgage Capitalization Rate = 120,564 ÷ 1,500,000 X 100 = 8.04%
33. D. $731,566
Building Allocation = $810,000
CCA for the First Year = 810,000 X 2% = $16,200
Undepreciated Capital Cost for Year 2 = 810,000 – 16,200 = $793,800
CCA for Year 2 = 793,800 X 4% = $31,752
Undepreciated Capital Cost for Year 3 = 793,800 – 31,752 = $762,048
CCA for Year 3 = 762,048 X 4% = $30,482
Undepreciated Capital Cost at the End of Year 3 = 762,048 – 30,482 = $731,566
►Tips: 1. Do not use the entire purchase price for calculation of CCA. CCA does not
apply to land. Use half rate (2%) for the first year of acquisition.
2. You can also calculate the UCC as follows: 810,000 – 2% – 4% – 4% = $731,566.
34. B. $118,562
Mortgage = $898,300 at 7.5% Interest, 25 Year Amortization
Calculate Monthly Payment & Interest Paid with HP Calculator
SHIFT C ALL
7.5 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
898300 PV
25 SHIFT xP/YR
PMT
MINICRAM NOTES
(Monthly Payment = $6,571.56)
102
MiniCram Real Estate Investment Analysis
1 INPUT 12 SHIFT AMORT
==
Mortgage Interest Paid in First Year = $65,910.85 or $65,911 (Rounded)
Additional Cost of Loan for 1 Year = 15,435 ÷ 5 = $3,087
CCA for the Building = 798,500 X 4% = $31,940
Taxable Income = 219,500 – 65,911 – 3,087 – 31,940 = $118,562
35. A. $275,000
►Estimate of Value = Last Year Net Operating Income ÷ Terminal Cap Rate
Estimated Sale Price = 99,600 ÷ 10.5% = $948,571
Mortgage Loan = 950,000 X 70% = $665,000
Calculate the Mortgage Balance After 5 Years with HP Calculator
SHIFT C ALL
6.5 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
665000 PV
25 SHIFT xP/YR
PMT
(Monthly Payment = $4,454.33)
1 INPUT 60 SHIFT AMORT
===
Balance Mortgage Loan = $601,529 (Rounded)
►Sale Proceeds = Sale Price – Mortgage Balance – Cost of Sale
= 948,571 – 601,529 – 72,000
= $275,042 or $275,000 (Rounded)
36. C. $2,584,000
Capitalize the Base Rent = 152,640 ÷ 9.5% = $1,606,737
Capitalize the Additional Rent = 114,850 ÷ 11.75% = $977,447
Estimate of Value = 1,606,737 + 977,447
= $2,584,184 = $2,584,000 (Rounded)
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
37. A. $11,490 and $15,253
Set the HP Calculator to 9 Decimal Places.
Property A
Property B
Clear the Old Settings
▲ C ALL
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
1 ▲ P/YR
Enter Initial Investment
40000 +/- CFj
50000 +/- CFj
Enter Cash Flow EOY1
4000 CFj
4200 CFj
Enter Cash Flow EOY2
8000 CFj
3860 CFj
Enter Cash Flow EOY3
10500 CFj
2450 CFj
Enter Cash Flow EOY4
50000 CFj
84200 CFj
Enter Discount Rate
10.5 I/YR
10.5 I/YR
Calculate Net Present Value
▲ NPV
▲ NPV
$11,490
$15,253
NPV
►Tip: The Cash Flow in the last year includes the sale price of the property.
38. D. 18.98%
Set the HP Calculator to 9 Decimal Places.
Clear the Old Settings
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
120000 +/- CFj
Enter Cash Flow EOY1
22000 CFj
Enter Cash Flow EOY2
19000 CFj
Enter Cash Flow EOY3
16000 CFj
Enter Cash Flow EOY4
14000 CFj
Enter Cash Flow EOY5
10000 CFj
Enter Cash Flow EOY6
191300 CFj ► (11,300 + 180,000)
Calculate IRR
▲ IRR
Internal Rate of Return = 18.98%
39. C. $438.28
Loan Amount = 36,400 – 14,000 = $22,400
Calculate Monthly Payment with HP Calculator
SHIFT C ALL
6.5 SHIFT NOM%
MINICRAM NOTES
104
MiniCram Real Estate Investment Analysis
12 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
22400 PV
5 SHIFT xP/YR
PMT
Monthly Payment = $438.28
40. A. $120.13
Discounted Price = 36,400 – 10% = $32,760
Down Payment = 14,000 + 2,500 = 16,500
New Loan Amount = 32,760 – 16,500 = $16,260
SHIFT C ALL
6.5 SHIFT NOM%
12 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
16,260 PV
5 SHIFT xP/YR
PMT
Monthly Payment = $318.15
Difference = 438.28 – 318.15 = $120.13
41. C. $80,858
SHIFT C ALL
7.5 SHIFT NOM%
12 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
5 SHIFT xP/YR
1500 ± PMT
PV
MINICRAM NOTES
105
MiniCram Real Estate Investment Analysis
Maximum Loan = $74,858 (Rounded)
Down Payment = $6,000
Maximum Purchase Price = 74,858 + 6,000 = $80,858
42. B. $1,805
Calculate the Maximum Loan (PV) with HP Calculator
SHIFT C ALL
6.5 SHIFT NOM%
12 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
5 SHIFT xP/YR
1500 ± PMT
PV
Maximum Loan = $76,663 (Rounded)
Down Payment = $6,000
Maximum Purchase Price = 76,663 + 6,000 = $82,663 (Rounded)
Difference in Loan Amount = 82,663 – 80,858 = $1,805
43. D. $154,283
The value at the time of disposition of the building has increased as compared to the value at
the time of acquisition. The entire amount of CCA claimed must be recaptured.
44. A. $252,315
Adjusted Cost Base = 3,890,000 + 260,000 = $4,150,000
Capital Gain = 4,746,000 - 4,150,000 – 91,370 = $504,630
Taxable Capital Gain = 504,630 X 50% = $252,315
45. B. $144,171
Taxable Income for the Year of Sale = 271,460 + 59,207 = $330,667
Tax Liability on Sale = 330,667 X 43.6% = $144,171
46. C. 17.68%
Annual Potential Rental Income
•
•
•
6 X 11.50 X 850 = $58,650
8 X 10.50 X 1,000 = $84,000
4 X 9.25 X 1,120 = $41,440
MINICRAM NOTES
106
MiniCram Real Estate Investment Analysis
Annual Potential Rental Income = (58,650 + 84,000 + 41,440) = $184,090
Vacancy Loss = 184,090 X 3.5% = $6,443
Other Income = 184,090 X 5% = $9,205
Net Operating Income = (184,090 – 6,443 + 9,205) – 55% = $84,083 (Rounded)
Estimate of Value = 84,083 ÷ 12% = $700,692 (Rounded)
Initial Investment = 700,692 X 30% = $210,208 (Rounded)
Annual Debt Service = 3,910.26 X 12 = $46,923
Cash Flow Before Tax = 84,083 – 46,923 = $37,160
Cash on Cash Ratio = 37,160 ÷ 210,208 X 100 = 17.68%
47. A. 80.23%
Annual Potential Rental Income = (58,650 + 84,000 + 41,440) = $184,090
Gross Operating Income = 184,090 – 6,443 + 9,205 = $186,852
Operating Expenses = 186,852 X 55% = $102,769
Annual Debt Service = 3,910.26 X 12 = $46,923
►Break-Even Ratio = (Operating Expenses + Annual Debt Service)
÷ Gross Operating Income
= (102,769 + 46,923) ÷ 186,853 X 100 = 80.23%
48. D. $39,425
Estimate of Value = 84,083 ÷ 12% = $700,692 (Rounded)
Amount of Loan = 700,692 X 70% = $490,484
SHIFT C ALL
6.5 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
490484 PV
25 SHIFT xP/YR
PMT
Monthly Payment = $3,285.38
Annual Debt Service = 3,285.38 X 12 = $39,424.56 = $39,425 (Rounded)
49. C. $644,824
From Part 2 (Question 47) and Part 3 (Question 48) of Case Study.
MINICRAM NOTES
107
MiniCram Real Estate Investment Analysis
Gross Operating Income = 184,090 – 6,443 + 9,205 = $186,852
Annual Debt Service = $39,425
Cash Flows
Gross Operating Income
186,852
186,852
186,852
186,852
– Expenses
- 55%
- 52%
- 58.5%
- 56%
= Net Operating Income
84,083
89,689
77,544
82,215
– Annual Debt Service
- 39,425
- 39,425
- 39,425
- 39,425
= Cash Flow Before Taxes
44,658
50,264
38,119
42,790
Net Operating Income in Year 4 = $82,215 Terminal Cap Rate = 12.75%
Estimate of Value = 82,215 ÷ 12.75% = $644,824 (Rounded)
50. B. 27.27%
Set the HP Calculator to 9 Decimal Places.
Clear the Old Settings
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
200000 +/- CFj
Enter Cash Flow EOY1
44658 CFj
Enter Cash Flow EOY2
50264 CFj
Enter Cash Flow EOY3
38119 CFj
Enter Cash Flow EOY4
302790 CFj ► (42,790 + 260,000)
Calculate IRR
▲ IRR
Internal Rate of Return = 27.27%
-----------------Back to Sample Exam 1
MINICRAM NOTES
Back to Table of Contents
108
MiniCram Real Estate Investment Analysis
SAMPLE EXAM 2
25. B. 11.52%
Annual Gross Operating Income = 825,000 – 3.5% + 25,500 = $821,625
Operating Expenses = 821,625 X 43.25% = 355,353 (Rounded)
Net Operating Income = 821,625 – 355,353 = $466,272
Initial Investment = 2,400,000 X 30% = $1,850,000
Mortgage Loan = 6,250,000 – 1,850,000 = 4,400,000
Annual Debt Service (Annual Interest on Mortgage)
= 4,400,000 X 5.75% = $253,000
Cash Flow Before Taxes = 466,272 – 253,000 = $213,272
Cash on Cash = 213,272 ÷ 1,850,000 X 100 = 11.52%
26. C. 6.64 years.
Gross Operating Income = 218,000 – 5% + 10,250 = $217,350
Operating Expenses = 217,350 X 56% = $121,716
Net Operating Income = 217,350 – 121,716 = $95,634
Mortgage Loan = 990,000 X 75% = $742,500
Initial Investment = 990,000 X 25% = $247,500
Calculate Monthly Mortgage Payment with HP Calculator
SHIFT C ALL
6.25 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
742500 PV
25 SHIFT xP/YR
PMT
Monthly Payment = $4,861.46
Annual Debt Service = 4,861.46 X 12 = $58,337 (Rounded)
Cash Flow Before Taxes = 95,634 – 58,337 = $37,297
Payback period = 247,500 ÷ 37,297 = 6.64 years
27. A. $148,200
►Potential Income = Sale Price ÷ Gross Income Multiplier
MINICRAM NOTES
109
MiniCram Real Estate Investment Analysis
Use the Higher GIM to Get Higher Limit of Gross Operating Income.
Potential Income = 900,000 ÷ 5.80 = $155,172
Less Vacancy and Credit Loss 4.5%
Gross Operating Income = 155,172 – 4.5 % = $148,189 = $148,200 (Rounded)
28. D. $367,200
Net Operating Income for Year 1 = $34,260
NOI Increases by 9.5% Every Year for next 3 Years
Net Operating Income for Year 4 = 34,260 + 9.5% + 9.5% + 9.5% = $44,981
Terminal Cap Rate = 12.25%
Estimate of Value at the Time of Sale (Reversionary Value)
= 44,981 ÷ 12.25% = $367,191.84
= $367,200 (Rounded)
►Tip: Do Not Use the Overall Capitalization Rate (Going-in Rate).
29. C. $7,396,000
Value Using Base Rent = 562,224 ÷ 9.75% = $5,766,400
Value Using Percentage Rent = 187,365 ÷ 11.5% = $1,629,261
Total Estimate of Value = 5,766,400 + 1,629,261 = $$7,395,661 or $7,396,000
30. B. 11.88%
►OCR = (Land Ratio X Rate of Return on Land)
+ [Building Ratio X (Rate of Return on Building + Recapture Rate)]
= (25% X 10%) + [75% X (10% + 2.5%)]
= (0.25 X 0.10) + [0.75 X (0.10 + 0.025)]
= 0.025 + (0.75 X 0.125)
= 0.025 + 0.09375
= 0.11875 or 0.11875 X 100 = 11.88%
31. D. $303,074
►In This Scenario, $670,000 is the Future Value (FV) and We Want to Calculate Present
Value (PV) Using the HP Calculator
SHIFT C ALL
12 I/YR
1 SHIFT P/YR
7 SHIFT xP/YR
MINICRAM NOTES
110
MiniCram Real Estate Investment Analysis
670000 ± FV
PV
Original Purchase Price = $303,074
32. B. $4,254.28
Calculate Monthly Mortgage Payment with HP Calculator
SHIFT C ALL
5.5 SHIFT NOM%
4 SHIFT P/YR
SHIFT EFF%
4 SHIFT P/YR
SHIFT NOM%
120000 FV
6 SHIFT xP/YR
PMT
Monthly Payment = $4,254.28
►Tip: Quarterly Compounding Means that P/YR is 4 because there are 4 Quarters in a Year.
33. A. $154,850.
►Capital Gain/Loss = Sale Price – Adjusted Cost Base – Cost of Sale
= 750,000 – 378,000 – 62,300 = $309,700
Taxable Capital Gain = 309,700 X 50% = $154,850.
►Tip: Ignore the Original Purchase Price and the Appraised Value.
34. D. $16,600.32
Undepreciated Capital Cost at the Time of Purchase = $28,820
CCA for Year 1 (2016) = 28,820 X 10% = $2,882
Undepreciated Capital Cost for Beginning of Year 2 = 28,820 – 2,882 = $25,938
CCA for Year 2 = 25,938 X 20% = $5,187.60
Undepreciated Capital Cost for Beginning of Year 3 = 25,938 – 5,187.60 = $20,750.40
CCA for Year 3 = 20,750.40 X 20% = $4,150.08
Undepreciated Capital Cost at End of Year 3 = 20,750.40 – 4,150.08 = $16,600.32
►Tip: Shortcut Method: UCC After 3 Years = $28,820 – 10% – 20% – 20% = $16,600.32
MINICRAM NOTES
111
MiniCram Real Estate Investment Analysis
35. C. 13.57%
Set the HP Calculator to 9 Decimal Places.
Clear the Old Settings
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
35000 +/- CFj
Enter Cash Flow EOY1
0 CFj
Enter Number of Years
8 SHIFT Nj
Enter Cash Flow EOY6
110000 CFj ► (Sale Price)
Calculate IRR
▲ IRR
Internal Rate of Return = 13.57%
36. A. $509,056
Annual Potential Rental Income = (26 X 800 X 11.50) + (20 X 1,120 X12.75)
= 239,200 + 285,600 = $524,800
Vacancy and Credit Loss = 3%
Gross Operating Income = 524,800 – 3% = $509,056
37. C. $104,101
Operating Expenses = 52%
Net Operating Income = 509,056 – 52% = $244,347 (Rounded)
Purchase Price = $2,550,000
Mortgage Loan = 2,550,000 X 70% = $1,785,000
Calculate Monthly Mortgage Payment with HP Calculator
SHIFT C ALL
6.25 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
1785000 PV
25 SHIFT xP/YR
PMT
Monthly Payment = $11,687.14
Annual Debt Service = 11,687.14 X 12 = $140,246 (Rounded)
Cash Flow Before Taxes = 244,347 – 140,246 = $104,101
MINICRAM NOTES
112
MiniCram Real Estate Investment Analysis
38. D. $1,741.02
Mortgage Loan = $725,000
Calculate Monthly Mortgage Payment with HP Calculator
SHIFT C ALL
SHIFT C ALL
6.5 SHIFT NOM%
6 SHIFT NOM%
2 SHIFT P/YR
2 SHIFT P/YR
SHIFT EFF%
SHIFT EFF%
12 SHIFT P/YR
12 SHIFT P/YR
SHIFT NOM%
SHIFT NOM%
725000 PV
725000 PV
15 SHIFT xP/YR
10 SHIFT xP/YR
PMT
PMT
Monthly Payment = $6,281.18
Monthly Payment = $8,022.20
Difference = 8,022.20 – 6,281.18 = $1,741.02
39. B. $35,169.63
Mortgage Loan = $725,000
Calculate Monthly Mortgage Payment with HP Calculator.
Set the calculator to 6 decimal places.
6.5% Interest, 15 Year Amortization
6% Interest, 10 Year Amortization
SHIFT C ALL
SHIFT C ALL
6.5 SHIFT NOM%
6 SHIFT NOM%
2 SHIFT P/YR
2 SHIFT P/YR
SHIFT EFF%
SHIFT EFF%
12 SHIFT P/YR
12 SHIFT P/YR
SHIFT NOM%
SHIFT NOM%
725000 PV
725000 PV
15 SHIFT xP/YR
10 SHIFT xP/YR
PMT
PMT
1 INPUT 60 SHIFT AMORT
1 INPUT 60 SHIFT AMORT
==
==
Interest Paid = $207,190.07
Interest Paid = $172,020.44
Difference in Interest Paid = 207,190.07 – 172,020.44
= $35,169.63
MINICRAM NOTES
113
MiniCram Real Estate Investment Analysis
40. C. $117,855
Mortgage Loan = $1,400,000, Interest Rate 10%, Amortization 15 Years
Calculate Monthly Mortgage Payment with HP Calculator
SHIFT C ALL
10 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
1400000 PV
15 SHIFT xP/YR
PMT
Monthly Payment = $14,871.78
Annual Debt Service = 14,871.78 X 12 = $178,461 (Rounded)
Cash Flow Before Taxes = 296,316 – 178,461= $117,855
41. B. 14.41%
Purchase Price = $1,975,200
Modified Net Operating Income = 1,975,200 X 11.5% = $227,148
Initial Investment = 1,975,200 – 1,400,000 = $575,200
Mortgage Loan = $1,400,000, Interest Rate 8.5%, Amortization 25 Years
SHIFT C ALL
8.5 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
1400000 PV
20 SHIFT xP/YR
PMT
Monthly Payment = $12,019.83
Annual Debt Service = 12,019.83 X 12 = $144,238 (Rounded)
Cash Flow Before Taxes = 227,148 – 144,238 = $82,910
Cash on Cash Ratio = 82,910 ÷ 575,200 X 100 = 14.41%
MINICRAM NOTES
114
MiniCram Real Estate Investment Analysis
42. D. 6.9 Years
►Payback Period = Initial Investment ÷ Cash Flow Before Taxes
Initial Investment = $572,200
Use the Cash Flow Before Taxes calculated in Part 2 of this scenario.
Cash Flow Before Taxes = 82,910
Payback Period = 572,200 ÷ 82,910 = 6.9 Years
43. A. $13,104
Set the HP Calculator to 9 Decimal Places.
Clear the Old Settings
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
70000 +/- CFj
Enter Cash Flow EOY1
4200 CFj
Enter Cash Flow EOY2
4110 CFj
Enter Cash Flow EOY3
95350 CFj
Enter Discount Rate
8 I/YR
Calculate Net Present Value
▲ NPV
NPV = $13,104
►Tip: The Cash Flow in the Last Year Includes the Sale Proceeds.
44. D. $95,014.
Set the HP Calculator to 9 Decimal Places.
Clear the Old Settings
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
85000 +/- CFj
Enter Cash Flow EOY1
2600 CFj
Enter Cash Flow EOY2
4700 CFj
Enter Cash Flow EOY3
113,200 CFj
Enter Discount Rate
8.5 I/YR
Calculate Net Present Value
▲ NPV
NPV = $10,014 (Rounded)
Initial Investment Required to Get Zero Net Present Value
= 85,000 + 10,014 = $95,014.
MINICRAM NOTES
115
MiniCram Real Estate Investment Analysis
45. C. – $45,228
Set the HP Calculator to 9 Decimal Places.
Clear the Old Settings
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
435000 +/- CFj
Enter Cash Flow EOY1
0 CFj
Enter Cash Flow EOY2
0 CFj
Enter Cash Flow EOY3
491000 CFj
Enter Discount Rate
8 I/YR
Calculate Net Present Value
▲ NPV
NPV = – $45,228 (Rounded)
46. A. $78,931
Annual Gross Operating Income = 313,925 – 15,696 + 10,625 = $308,854
Operating Expenses = $189,081
Net Operating Income = 308,854 – 189,081 = $119,773
Loan Amount = 870,000 + 10,150 = $880,150
Calculate Monthly Payment with HP Calculator
SHIFT C ALL
7.75 SHIFT NOM%
12 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
880150 PV
25 SHIFT xP/YR
PMT
Monthly Payment = $6,577.54
Annual Debt Service = 6,577.54 X 12 = $78,931 (Rounded)
47. C. 5.67%
Net Operating Income = 308,854 – 189,081 = $119,773
Annual Debt Service = 6,577.54 X 12 = $78,930
Cash Flow Before Taxes = 119,773 - 78,930 = $40,843
Tax Liability = $23,560
MINICRAM NOTES
116
MiniCram Real Estate Investment Analysis
Cash Flow After Taxes = 40,843 – 23,560 = $17,283
Initial Investment = 1,175,000 – 870,000 = $305,000
Cash on Cash Ratio = 17,283 ÷ 305,000 X 100 = 5.67%
48. B. $1,358,000
Cash Flow for EOY1 = 40,843
Cash Flow for EOY2 = 40,843 + 7% = $43,702
Cash Flow for EOY 3 = 43,702 + 7% = $46,761
Cash Flow for EOY 3 = 46,761 + 7% = $50,034
Annual Debt Service = $78,930
Net Operating Income in Year 4 = 50,034 + 78,930 = $128,964
Estimate of Value = 128,964 ÷ 9.5% = $1,357,516 = $1,358,000 (Rounded)
49. D. 86.78%
Annual Gross Operating Income = 313,925 – 15,696 + 10,625 = $308,854
Operating Expenses = $189,081
Annual Debt Service = $78,931
Break-Even Ratio = (189,081 + 78,931) ÷ 308,854 X 100 = 86.78%
-----------------Back to Sample Exam 2
Back to Table of Contents
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MINICRAM NOTES
117
MiniCram Real Estate Investment Analysis
SAMPLE EXAM 3
17. C. 10.49%
Gross Operating Income = 286,000 – 5% + 15,360 = $287,060
Net Operating Income = 287,060 – 58.5% = $119,130 (Rounded)
Mortgage Loan = $800,000, Interest rate 6%, Amortization 25 Years
Calculate Monthly Mortgage Payment with HP Calculator
SHIFT C ALL
6 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
800000 PV
25 SHIFT xP/YR
PMT
Monthly Payment = $5,118.45
Annual Debt Service = 5,118.45 X 12 = $61,421 (Rounded)
Cash Flow Before Taxes = 119,130 – 61,421 = $57,709
Initial Investment = 1,350,000 – 800,000 = $550,000
Cash on Cash Ratio = 57,709 ÷ 550,000 X 100 = 10.49%
22. C. Property C has lesser payback period than property B but more than property A.
► Payback Period = Initial Investment ÷ Cash Flow Before Taxes
Property A: 80,000 ÷ (450 X 12) = 14.81 Years
Property B: 76,000 ÷ (370 X 12) = 17.11 Years
Property C: 65,000 ÷ 4,000 = 16.25 Years
Ascending Order of Payback Period is Property A, Property C and Property B.
24. D. $3,097.22
Total CFBT in 5 Years = 18,200 – 3,300 + 17,300 + 23,800 + 32,500 = $88,500
Remaining Amount = 200,000 – 88,500 = $111,500
Monthly Payments in 3 Years = 111,500 ÷ 36 = $3,097.22
25. B. $184,838 to $192,605
Sale Price = $1,200,000. Vacancy and Credit Loss = 4.5%
MINICRAM NOTES
118
MiniCram Real Estate Investment Analysis
With GIM of 5.95
Potential Income = 1,200,000 ÷ 5.95 = $201,681
Gross Operating Income = 201,681 – 4.5% = $192,605
With GIM of 6.20
Potential Income = 1,200,000 ÷ 6.20 = $193,548
Gross Operating Income = 193,548 – 4.5% = $231,048
Range of Gross Operating Income = $184,838 to $192,605.
26. D. $1,485,000
Value = Gross Operating Income X Gross Income Multiplier
Estimate of Value = 180,000 X 8.25 = $1,485,000
►Tip: Do not Use the Net Operating Income when Using GIM.
27. B. $1,565,400
Gross Operating Income = 274,350 – 4.5% + 14,750 = $276,754
Operating Expenses = $112,385
Net Operating Income = 276,754 – 112,385 = $164,369
Estimate of Value = 164,369 ÷ 10.5% = $1,565,419
= $1,565,400 (Rounded)
28. A. $3,373,500
Value Based on Base Rent = 201,600 ÷ 9.25% = $2,179,459
Value Based on Additional Rent = 143,280 ÷ 12% = $1,194,000
Estimate of Total Value = 2,179,459 + 1,194,000
= $3,373,459 = $3,373,500 (Rounded)
29. D. The first loan is economical because lesser interest is paid during the amortization
period.
Mortgage Loan = 50,000 X 75% = 37,500
Calculate Monthly Mortgage Payment with HP Calculator.
7.5% Interest, 8 Year Amortization
6% Interest, 12 Year Amortization
SHIFT C ALL
SHIFT C ALL
7.5 SHIFT NOM%
6 SHIFT NOM%
2 SHIFT P/YR
2 SHIFT P/YR
SHIFT EFF%
SHIFT EFF%
12 SHIFT P/YR
12 SHIFT P/YR
SHIFT NOM%
SHIFT NOM%
MINICRAM NOTES
119
MiniCram Real Estate Investment Analysis
37500 PV
37500 PV
8 SHIFT xP/YR
12 SHIFT xP/YR
PMT
PMT
(Monthly Payment = $518.49)
1 INPUT 96 SHIFT AMORT = =
Interest Paid = $12,274.73
(Monthly Payment = $364.52)
1 INPUT 144 SHIFT AMORT = =
Interest Paid = $14,990.32
The first loan is cost-effective because lesser interest has to be paid during the
amortization period.
31. A. $486,105
Net Operating Income = $128,300
Capitalization Rate = 10.5%
Building Value = 128,300 ÷ 10.5% = $1,221,905
Building Replacement Cost = $735,800
Land Value = 1,221,905 – 735,800 = $486,105
32. B. $787,600
Net Operating Income = $183,450
Land Value = $850,000
Capitalization Rate for Land = 10%
Income from Land = 850,000 X 10% = $85,000
Residual Net Income for Building = 183,450 – 85,000 = $98,450
Value of Building = 98,450 ÷ (10% + 2.5%)
= 98,450 ÷ 12.5% = $787,600
33. D. Zero.
Recapture may occur if the value of a depreciable capital asset increases as compared to
its value at the time of acquisition.
Recapture may occur for whole or part of the Capital Cost Allowance (CCA) claimed
during the period of ownership.
No recapture of Capital Cost Allowance (CCA) occurs in this case.
The value of depreciable assets (building component) at the time of sale was zero.
35. A. ‒ $9,520
Cash Flow for EOY1 = $5,300
Cash Flow for EOY6 = 5,300 + 44,500 = $49,800
Set the HP Calculator to 9 Decimal Places.
MINICRAM NOTES
120
MiniCram Real Estate Investment Analysis
Clear the Old Settings
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
60000 +/- CFj
Initial Cash Flow EOY1
5300 CFj
Cash Flow (4 More Years)
4 SHIFT Nj
Enter Cash Flow for EOY6
49800 CFj
Enter Discount Rate
8.5 I/YR
Calculate Net Present Value
▲ NPV
NPV = ‒ $9,520 (Rounded)
36. B. 7.56%
Set the HP Calculator to 9 Decimal Places.
Clear the Old Settings
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
32000 +/- CFj
Enter Cash Flow EOY1
4150 CFj
Cash Flow (Next 7 Years)
12 SHIFT Nj
Calculate IRR
▲ IRR
Internal Rate of Return = 7.56%
37. D. $407,458
Sale Price = $470,000; Cost of Sale = $26,500
Net Sale Proceeds = 470,000 – 26,500 = $443,500
Cash Flow for EOY6 = $42,360
Total Cash Flow for EOY6 = 443,500 + 42,360 = $485,860
Clear the Old Settings
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
0 +/- CFj
Cash Flow EOY1
42,360 CFj
Cash Flow (5 More Years)
5 SHIFT Nj
Enter Cash Flow EOY6
485,860 CFj
Enter Discount Rate
11.5 I/YR
Calculate Net Present Value
▲ NPV
NPV = $407,458 (Rounded)
MINICRAM NOTES
121
MiniCram Real Estate Investment Analysis
39. A. $15,012 and $6,377
Set the HP Calculator to 9 Decimal Places.
Property A
Property B
Clear the Old Settings
▲ C ALL
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
1 ▲ P/YR
Enter Initial Investment
40000 +/- CFj
50000 +/- CFj
Enter Cash Flow EOY1
4000 CFj
4200 CFj
Enter Cash Flow EOY2
8000 CFj
3880 CFj
Enter Cash Flow EOY3
60500 CFj
66650 CFj
Enter Discount Rate
10.5 I/YR
10.5 I/YR
Net Present Value
▲ NPV
▲ NPV
$15,012
$6,377
NPV
►Tip: The Cash Flow in the Last Year Includes the Sale Proceeds.
40. C. $5,991
Set the HP Calculator to 9 Decimal Places.
Clear the Old Settings
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
40000 +/- CFj
Initial Cash Flow EOY1
4000 CFj
Initial Cash Flow EOY2
8000 CFj
Initial Cash Flow EOY3
60500 CFj
Enter Discount Rate
12.5 I/YR
Calculate Net Present Value
▲ NPV
NPV = $12,368 (Rounded)
Difference in NPV = 12,368 – 6,377 = $5,991
41. A. $204,488
Recalculate the net Operating Income as Follows:
Gross Annual Potential Rental Income = [(10 X 925) + (8 X 1,300) + (5 X 1,550)] X 12
= 111,000 + 124,800 + 93,000 = $328,800
Vacancy and Credit Loss = 328,800 X 4% = $13,152
Other Income (Parking) = 23 X 35 X 12 = $9660
Gross Operating Income = 328,800 – 13,152 + 9660 = $325,308
MINICRAM NOTES
122
MiniCram Real Estate Investment Analysis
Add Management fees of 2.5% of Gross Operating Income to Expenses
= 328,800 X 2.5% = $8,220
Total Operating Expenses = 112,600 + 8,220 = $120,820
Net Operating Income = 325,308 – 120,820 = $204,488
42. D. $2,152,500
Use the Net Operating Income from the Part 1 of this scenario.
► Value = Net Operating Income ÷ Cap Rate
Value = 204,488 ÷ 9.5% = $2,152,505 = $2,152,500 (Rounded).
43. B. Yes, the amount of recaptured CCA would be $116,671 because the building allocation
at the time of sale was much more than it was at the time of purchase.
Improvement Allocation at the time of purchase = $877,500
Total CCA Claimed = $116,671
Undepreciated Capital Cost at the Time of Sale = 877,500 - 116,671 = $760,829
The entire CCA amount of $116,671 would be recaptured because the improvement
allocation at the time of sale is $1,170,000, and this amount is much more than the
undepreciated capital cost of $760,829.
44. D. $149,400
Sale Price = $1,950,000
Adjusted Coast Base = 1,350,000 + 140,000 = $1,490,000
Cost of Sale = $63,700
Realty Commission = 1,950,000 X 5% = 97,500
Capital Gain = 1,950,000 – 1,490,000 – 63,700 – 97,500 = $298,800
Taxable Capital Gain = 298,800 X 50% = $149,400
45. A. $125,584.43
►Capital Gain = Sale Price – Adjusted Cost Base – Cost of Sale
= 2,220,000 – 1,650,000 – 66,320 = $503,680
Taxable Capital Gain = 503,680 X 50% = $251,840
Recaptured CCA = $58,245
Total Taxable Income = 251,840 + 58,245 = $310,085
Marginal Tax Rate = 40.5%
Tax Liability on Sale = 310,085 X 40.5%
= $125,584.43
MINICRAM NOTES
123
MiniCram Real Estate Investment Analysis
47. C. $51,891
Total Purchase Price = 920,000 + 23,500 = 943,500
Mortgage Loan = 943,500 X 70% = $660,450
Interest Rate 6.25%, Amortization 25 Years
Calculate Monthly Mortgage Payment with HP Calculator
SHIFT C ALL
6.25 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
660450 PV
25 SHIFT xP/YR
PMT
Monthly Payment = $4,324.24
Annual Debt Service = 4,324.24 X 12 = $51,891 (Rounded).
49. A. $11,322.00 and $22,191.12
Using the Declining Balance Method and the Half-Year Rule, the CCA will be calculated
on Improvement Allocation (Building Cost) as Follows.
Improvement Allocation = 943,500 X 60% = $566,100
CCA for Year 1 = 566,100 X 2% = $11,322
UCC for Year 2 = 566,100 – 11,322 = $554,778
CCA for Year 2 = 554,778 X 4% = $22,191.12
►Tip: CCA is Calculated Only on Improvements. Land Does Not Depreciate.
50. B. $87,628
Initial Investment = 943,500 X 30% = $283,050
•
•
•
•
•
Cash Flow for EOY1 = $32,460
Cash Flow for EOY2 = $32,460 + 5% = $34,083
Cash Flow for EOY3 = $34,083 + 5% = $35,787
Cash Flow for EOY4 = $35,787 + 5% = $37,577
Cash Flow for EOY5 = $37,577 + 5% = $39,455
Sale Proceeds = $380,000
Total Cash Flow for EOY5 = 380,000 + 39,455 = $419,455
Set the HP Calculator to 9 Decimal Places.
MINICRAM NOTES
124
MiniCram Real Estate Investment Analysis
Clear the Old Settings
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
283050 +/- CFj
Enter Cash Flow EOY1
32460 CFj
Enter Cash Flow EOY2
34083 CFj
Enter Cash Flow EOY3
35787 CFj
Enter Cash Flow EOY3
37577 CFj
Enter Cash Flow EOY3
419455 CFj
Enter Discount Rate
10 I/YR
Calculate Net Present Value
▲ NPV
NPV = $87,628 (Rounded)
-----------------Back to Sample Exam 3
MINICRAM NOTES
Back to Table of Contents
125
MiniCram Real Estate Investment Analysis
SAMPLE EXAM 4
14. C. 12.11%
Annual Potential Rental Income
Small Units = 15 X 1,200 X 15.75 = $283,500
Large Units = (1,600 X 14.50) + (1,850 X 14.50) = 23,200 + 26,825 = $50,025
Annual Potential Rental Income = 283,500 + 50,025 = $333,525
Net Operating Income = 333,525 – 6% - 48% = $163,027
Annual Debt Service = $50,400
Cash Flow Before Taxes = 163,027 – 50,400 = $112,627
Initial Investment = $930,000
Cash on Cash Ratio = 112,627 ÷ 930,000 X 100 = 12.11%
15. D. 0.80 years
Property 1: Payback Period = 62,000 ÷ 5,450 = 11.37 years
Property 2: Payback Period = 55,000 ÷ 5,200 = 10.57 years
Difference = 0.8 years
16. A. $41,87.50
Total Cash Flow in 5 years = $99,250
Remaining Amount = 250,000 – 99,250 = $150,750
Monthly Payments for Remaining 3 Years = 150,750 ÷ 36 = $4,187.50
17. B. 5.6 years.
Total Cash Flow Before Taxes in 4 Years = 1,300 X 12 X 3 = 46,800
Balance Amount = 125,000 – 46,800 = $78,200
New Cash Flow Before Taxes = 1,150 X 12 = $13,800
Number of Years Required for Repayment = 78,200 ÷ 13,800 = 5.6 years
18. D. 80.20%
Gross Operating Income = 382,435 – 3.5% + 25,560 = $394,609.78
Operating Expenses = 394,609.78 X 62% = $244,658.06
Net Operating Income = 394,609.78 – 244,658.06 = $149,951.72
Annual Debt Service = (2,280.60 X 12) + (3,647.75 X 12) = $71,140.20
Cash Flow Before Taxes = $149,951.72 – 71,140.20 = $78,811.52
Break-Even Ratio = (244,658.06 + 71,811.52) ÷ 394,609.78 X 100
= 80.20%
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
22. D. $605,000.
Gross Income Multiplier (GIM) from Comparable Sales
•
Sale #1: 580,000 ÷ 140,784 = 4.12
•
Sale#2: 615,500 ÷ 148,825 = 4.13
•
Sale #3: 664,300 ÷ 161,647 = 4.11
A reasonable GIM is 4.12
Value of Subject Property = 146,760 X 4.12 = $604,651.20 or $605,000.
23. B. $3,185,526
Net Operating Income = $336,783
Income from Base Rent = 336,783 X 72% = $242,483.76
Income from Percentage Rent = 336,783 X 28% = $94,299.24
Value Based on Base Rent = 242,483.76 ÷ 9.75% = $2,487,013
Value Based on Percentage Rent = 94,299.24 ÷ 13.5% = $698,513
Total Value Using the Split Rates = 2,487,013 + 698,513
= $3,185,526.17 or $3,185,526 (Rounded)
26. A. 8.22%
Amount of Mortgage Loan = 2,250,000 – 850,000 = $1,400,000
Monthly Mortgage Payment = $9,590.69
Annual Debt Service = 9,590.69 X 12 = 115,088.28
Mortgage Capitalization Rate = 115,088.28 ÷ 1,400,000 X 100 = 8.22%
29. A. $587,468
First Year Net Operating Income (NOI) = $62,100
In the next four years, the NOI would have increased by 1% every year.
NOI for Year 2 = 62,100 + 1% = $62,721
NOI for Year 3 = 62,721 + 1% = $63,384.21
NOI for Year 4 = 63,384.21 + 1% = $63,981.69
NOI for Year 5 = 63,981.69 + 1% = $64,621.51
Cap Rate & Risk Factor = 9.5% + 1.5% = 11%
Reversionary Value after Year 5 = 64,621.51 ÷ 11% = $587,468.
30. B. $3,996.55
Amount of Money Required (Sinking Fund) = $340,000
Interest Rate = 5.5%, Time Period (Amortization) = 6 Years.
MINICRAM NOTES
127
MiniCram Real Estate Investment Analysis
Set the HP Calculator to 6 Decimal Places. Calculate the Required Monthly Payment.
SHIFT C ALL
5.5 SHIFT NOM%
12 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
340000 FV
6 SHIFT xP/YR
PMT
Monthly Payment = $3,996.55
31. D. $215,351.73
Mortgage = $750,000 at 6.25% Interest, 20 Year Amortization
Calculate Monthly Payment & Interest Paid with HP Calculator
SHIFT C ALL
6.25 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
7500000 PV
20 SHIFT xP/YR
PMT
(Monthly Payment = $5,447.11)
The term is 5 years or 60 months.
1 INPUT 60 SHIFT AMORT
==
Interest Paid in 5 years = $215,351.73
32. B. $5,268.05
Loan Amount = $34,500
8.5% Interest, Amortization 10 Years
8% Interest, Amortization 8 Years
SHIFT C ALL
SHIFT C ALL
8.5 SHIFT NOM%
8 SHIFT NOM%
2 SHIFT P/YR
2 SHIFT P/YR
MINICRAM NOTES
128
MiniCram Real Estate Investment Analysis
SHIFT EFF%
SHIFT EFF%
12 SHIFT P/YR
12 SHIFT P/YR
SHIFT NOM%
SHIFT NOM%
34500 PV
34500 PV
10 SHIFT xP/YR
8 SHIFT xP/YR
PMT
PMT
(Monthly Payment = $425.05)
(Monthly Payment = $485.47)
The term is 5 years or 60 months for both loans.
1 INPUT 60 SHIFT AMORT
1 INPUT 60 SHIFT AMORT
=
=
Principal Paid = $13,711.08
Principal Paid = $18,979.13
Difference in Principal Paid = 18,979.13 – 13,711.08 = $5,268.05
34. D. $499,617
►Sale Proceeds = Sale Price – Mortgage Balance – Cost of Sale – Tax Liability
Sale Proceeds After Taxes = 1,230,000 – 527,438 – 64,570 – 138,375
= $499,617
35. C. $691,796
Using the HP Calculator, Calculate the Monthly Payment and Outstanding Balance of
Mortgage After 4 Years.
SHIFT C ALL
7.75 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
843750 PV
25 SHIFT xP/YR
PMT
Monthly Payment = $6,305.52
Do Not Clear the Calculator. Calculate the Outstanding Balance after 4 Years (48 Months)
1 INPUT 48 SHIFT AMORT
===
Mortgage Balance = $791,057 (rounded)
MINICRAM NOTES
129
MiniCram Real Estate Investment Analysis
NOI in Year 4 = 172,204
Terminal Cap Rate = 10.75%
Sale Price (Value) = 172,204 ÷ 10.75% = $1,601,898 (rounded)
Cost of Sale = $119,045
Sale Proceeds Before Taxes = 1,601,898 – 791,057 – 119,045
= $691,796
37. B. $8,350
Annual Market Rent of the Leasehold Interest = 700 X 12 = $8,400
Annual Rent Paid by the Tenant = 550 X 12 = $6,600
Difference Per Annum = 8,400 – 6,600 = $1,800
Lease Term = 8 years, Discount Rate = 14%
Set the HP Calculator to 9 Decimal Places.
Clear the Old Settings
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
0 +/- CFj
Initial Cash Flow EOY1
1800 CFj
Cash Flow (8 More Years)
8 SHIFT Nj
Enter Discount Rate
14 I/YR
Calculate Net Present Value
▲ NPV
NPV = $8,350 (Rounded)
39. D. $779,835
UCC in Beginning of the Year = $812,328
CCA Rate = 4%
CCA = 812,328 X 4% = $32,493.12
UCC at the End of Year = 812,328 – 32,493.12 = $779,834.88 or $779,835 (Rounded).
40. B. $124,026
Mortgage Loan = $935,500; Interest Rate = 7.5%, Amortization = 25 Years.
Using the HP Calculator, Calculate the Monthly Payment and Interest Paid in 1 Year.
SHIFT C ALL
7.5 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
MINICRAM NOTES
130
MiniCram Real Estate Investment Analysis
12 SHIFT P/YR
SHIFT NOM%
935500 PV
25 SHIFT xP/YR
PMT
Monthly Payment = $6,843.70
Do Not Clear the Calculator. Calculate the Interest Paid in Year 1 (12 Months)
1 INPUT 12 SHIFT AMORT
==
Interest Paid in Year 1 = $68,640.32
Amortization of Loan Fee = 16,080 ÷ 5 = $3,216
► (From Question 39)
CCA = $32,493.12
See the Completed Chart Given Here:
7.
= Net Operating Income
8.
- Non-Operating Expenses
9.
- Interest on 1st Mortgage
10.
- Interest on 2nd Mortgage
11.
- Amortization of Loan Fees
14.
15.
16.
= Income Before CCA
- CCA
= Taxable Real Estate Income
228,375
- 68,640
- 3,216
= 156,519
- 32,493
= 124,026
Taxable Real Estate Income = $124,026
41. A. $272,376
Annual Potential Rental Income
One-bedroom Units = 16 X 900 X 12 = $172,800
Two-bedroom Units = 8 X 1,050 X 12 = $100,800
Income from Laundry = 24 X 25 X 12 = $7,200
All Income = 172,800 + 100,800 + 7,200 = $280,800
Vacancy and Credit Loss = 3% of All Income
Gross Operating Income = 280,800 – 3% = $272,376
MINICRAM NOTES
131
MiniCram Real Estate Investment Analysis
Total Operating Expenses (Add the Expenses Given in the List) = $104,420
Net Operating Income = 272,376 – 104,420 = $167,956
42. C. $1,600,000
Gross Operating Income = $272,376
► (From Question 41)
Total Operating Expenses = $104,420
Net Operating Income = 272,376 – 104,420 = $167,956
Capitalization Rate = 10.5%
Estimate of Value = 167,956 ÷ 10.5%
= $1,599,581 or $1,600,000 (Rounded)
43. B. $37,094.88
Initial Investment $675,000; Discount Rate of 8.5% and cash flow as Follows
Cash Flow in EOY1 to EOY4 = 7,500
Sale Price After 5 Years = $850,000
This is Also Known as Reversionary Value
Add Sale Proceeds to EOY5 Cash Flow
Cash Flow EOY5 = 850,000 + 7,500 = $857,500
Clear the Old Settings
▲C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
675000 +/- CFj
Enter Cash Flow EOY1
7500 CFj
Repeated for 3 More Years
3 ▲ Nj
Enter Cash Flow EOY5
857500 CFj
Enter Discount Rate
8.5 I/YR
Calculate Net Present Value
▲ NPV
NPV = $37,094.88
44. A. 16.06%
Initial Investment = $90,000
Cash Flow for Years 1 to 7 = $8,500
Cash Flow for Year 8 = 175,000 + 8,500 = $183,500
Set the HP Calculator to 9 Decimal Places.
MINICRAM NOTES
132
MiniCram Real Estate Investment Analysis
Clear the Old Settings
▲ C ALL
Enter Payments Per Year
1 ▲ P/YR
Enter Initial Investment
90000 +/- CFj
Enter Cash Flow
8,500 CFj
Repeat for 7 Years
7 ▲ Nj
Enter Cash Flow EOY8
183,500 CFj ► (175,000 + 8,500)
Calculate IRR
▲ IRR
Internal Rate of Return = 16.06%
46. D. $72,047
Net Operating Income = $301,292.
Mortgage Loan $1,750,000; Interest Rate 10.5%; Amortization 15 Years.
Calculate the Annual Debt Service Using HP Calculator.
SHIFT C ALL
10.5 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF%
12 SHIFT P/YR
SHIFT NOM%
1750000 PV
15 SHIFT xP/YR
PMT
Monthly Payment = $19,103.70
Annual Debt Service = 19,103.70 X 12 = $229,244 (Rounded)
Cash Flow Before Taxes = 301,291 – 229,244 = $72,047
47. B. $6,929
Option 1: Net Operating Income = $301,292.
Mortgage Loan $1,750,000; Interest Rate 8.5%; Amortization 25 Years.
SHIFT C ALL 8.5 SHIFT NOM% 2 SHIFT P/YR SHIFT EFF% 12 SHIFT P/YR
SHIFT NOM% 1750000 PV 25 SHIFT xP/YR PMT
Monthly Payment = $13,918.86
Annual Debt Service = 13,918.86 X 12 = $167,026 (Rounded)
Cash Flow Before Taxes = 301,291 – 167,026 = $134,265
MINICRAM NOTES
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MiniCram Real Estate Investment Analysis
Option 2: Net Operating Income = $301,292.
Mortgage Loan $1,850,000; Interest Rate 8%; Amortization 20 Years.
SHIFT C ALL 8 SHIFT NOM% 2 SHIFT P/YR SHIFT EFF% 12 SHIFT P/YR
SHIFT NOM% 1750000 PV 20 SHIFT xP/YR PMT
Monthly Payment = $14,496.26
Annual Debt Service = 14,496.26 X 12 = $173,955 (Rounded)
Cash Flow Before Taxes = 301,291 – 173,955 = $127,336
Difference in Cash Flow Before Taxes = 134,265 - 127,336 = $6,929
49. C. 16.39%
Initial Investment (Down Payment) = 2,450,000 – 1,750,000 = $700,000
Net Operating Income = 2,450,000 X 11.5% = $281,750
Annual Debt Service = $167,026
► (From Question 48)
Cash Flow Before Taxes = 281,750 – 167,026 = $114,724
Cash on Cash Ratio = 114,724 ÷ 700,000 X 100 = 16.39%
50. D. 6.1 years
Payback Period = 700,000 ÷ 114,724 = 6.1 years
►Tip: Payback Period calculation is reciprocal of Cash on Cash ratio calculation. See below:
Cash on Cash Ratio = Cash Flow Before Taxes ÷ Initial Investment
Payback Period = Initial Investment ÷ Cash Flow Before Taxes
-----------------Back to Sample Exam 4
MINICRAM NOTES
Back to Table of Contents
134