EXAM II - VERSION A
Real Estate Decision Making – Fall 2011
Dr. M. Schmidt
NAME
Section
This exam consists of 50 multiple choice questions (2 points each). For each question mark only ONE
answer on both the exam and the scantron sheet. Be sure to fill out "ALL" the information on the
scantron sheet. Mark the version of your exam (A or B) under test form code on the scantron sheet.
1. _______ means that the house is separated from any adjoining structure with at least some open land on all
four sides.
a. Second home
b. Zero-lot house
c. Detached house
d. Patio house
2. Consider a mortgage with a loan amount of $300,000, and APR of 10%, and monthly payments for 15
years. If the borrower decides to repay the mortgage after 3 years, what it the amount outstanding at that
time?
a. $269,758
b. $294,455
c. $291,165
d. $254,323
e. none of the above
3. A borrower is offered a mortgage loan for $100,000 with an interest rate of 8% APR, 1.5 discount points,
and a 30-year amortization period with monthly payments. What is the effective interest rate if the loan is
prepaid after 2 years?
a. 8.16% APR
b. 0.68% per month
c. 8.83% APR
d. 0.74% APR
e. none of the above
4. A lender makes a $90,000 mortgage at 9% APR interest with monthly payments for 25 years. How much
principal will be repaid during the fourth year of the loan? (note: use the amortization schedule in your
calculator)
a. $7,749
b. $1,314
c. $1,376
d. $7,787
5. Which evaluation criteria is best suited for real estate investment projects for which no assumed future sales
price is given?
a. Capitalization rate
b. NPV
c. IRR
d. Payback period
1
6. Assume that a building has 2,000 SF of rentable office space. The space can be rented annually for $21 per
square foot. The lease calls for a 2% rent increase per year. If vacany and bad debt allowance are 5% of
potential gross income (PGI) and operating expenses are estimated at $30,000 per year, what is NOI in the
second year?
a. $10,698
b. $9,900
c. $40,698
d. none of the above.
7. The suburban version of the row house is most generally called a
a. patio house.
b. condominium.
c. townhouse.
d. zero-lot-line house.
8. Regarding market analysis for residential development, which of the following is not true?
a. Market analysis reduces the risk of real estate development.
b. A high percentage of unsold housing generally indicates a poor market.
c. Successful market analysis requires the determination of the type of housing preferred by various income
groups.
d. A high number of unsold housing of a specific type always indicates a good market for that particular
housing type.
9. Amortization is the
a. practice of charging interest on a loan.
b. process of gradually retiring a debt by periodic payments.
c. compounding of interest.
d. use of debt to enhance the rate of return.
10. Which of the following is correct?
a. U.S. Assets Group uses only independent outside REALTORS to sell its condominium units and golf
course community lots.
b. Appraisers are not used by developers in their market analysis of a project.
c. According to the owner of US Asstes Group, it is a wise decision for developers to develop projects in
different geographic areas since new opportunities open up there.
d. Companies that are involved in areas unrelated to real estate development can easily enter into the real
estate development field since this business does not require a lot of experience.
e. U.S. Assets Group uses both outside sources such as REALTORS and an in-house research department for
its market and feasibility analysis.
11. Assume you are analyzing the following 2 projects: Project A has a CF0 of -250, CF1 of 180, and CF2 of
170. Project B has a CF0 of -320, CF1 of 220 and CF2 of 210. If you had to rank the two projects you
would chose:
a. Project A because it has a higher IRR.
b. Project B if the required rate of return is less than 9.38%
c. Project A if the required rate of return is less than 9.38%.
d. Either project A or B, it does not matter.
e. None of the above.
2
12. You are buying a $62,000 house with a 10% down payment, with the rest financed at 11 3/4% APR for 30
years with fixed monthly payments. What is your monthly loan payment?
a. $551.62
b. $577.42
c. $563.25
d. $574.52
13. Which of the following is NOT correct with regards to US Assets Group, a local residential real estate
development firm?
a. the company specializes in the development of condominiums and high-end golf course communities.
b. the company is both a builder and a developer.
c. the company uses IRR and NPV exclusively in the financial analysis of development projects.
d. the company has developed the Founders Club, a high-end community in Sarasota.
e. the company has managed over $1 billion worth of real estate on tens of thousands of acres.
14. When a mortgage loan with level periodic payments has been completely repaid by the maturity date, it is
said to be
a. capitalized.
b. re-amortized.
c. depreciated.
d. fully amortized.
15. A _______ is defined as an unplanned series of buildings constructed along major streets in the center of a
town.
a. neighborhood shopping center
b. central business district
c. power center
d. discount shopping center
16. Which statement is not true?
a. Real estate development often requires a large cash outflow over a long period before a positive cash flow
occurs.
b. Development loans are usually needed to absorb the large negative cash flows during the early months of
such projects.
c. Doing business as a Limited Liability Corporation helps to reduce the developer's risk.
d. The feasibility of a residential project is independent of the absorption rate in the market.
17. The term _______ refers to principal and interest payments for any outstanding mortgage debt.
a. debt service
b. BTER
c. ATER
d. NOI
3
18. Consider an adjustable rate mortgage of $90,000 with a maturity of 30 years and monthly payments. At
the end of each year, the interest rate is adjusted to become two percentage points above the index. There
is an annual cap of 300 basis points (3%), and a lifetime cap of 500 basis points (5%). In the first year the
contract rate is 7%, with no teaser. In year two, the index rate is 9%. What is the monthly payment in
year two?
a. $786
b. $795
c. $599
d. $648
19. Given the same information as in # 18, what is the contract rate in year two?
a. 8%
b. 10%
c. 9%
d. 11%
20. A real estate investment costs $28,000 and is expected to return to its owner $3,500 per year for 16 years
after expenses. At the end of year 16, the property is expected to be sold for $49,000. Which statement best
describes the internal rate of return (IRR) of the investment?
a. The IRR is greater than 14%
b. The IRR is just below 14%
c. The IRR may be less than or greater than 14%
d. The IRR is zero
21. Given the following information:
Gross Selling Price:
$1,000,000
Net Selling Price:
$950,000
Accumulated Depreciation:
$200,000
Loan Payoff:
$350,000
Purchase Price:
$350,000
Depreciated Value:
$150,000
Capital Gain Tax Rate:
20%
What are the taxes due on the sale?
a. $50,000
b. $160,000
c. $170,000
d. $280,000
22. Loans made for a stated term on which interest payments are due periodically but whose principal is not
repaid until the end of the term are called _______ loans.
a. amortized
b. depreciated
c. adjustable
d. interest-only term
23. A developer contemplating the construction of a shopping center must recognize that
a. a new center will always succeed.
b. one does not need to analyze the status of the competition.
c. a new center can do little to create demand.
d. a new center cannot create supply.
4
24. Which of the following is not normally included as one of the advantages of real estate as an investment?
a. Liquidity
b. Cash flow from operations
c. Possible appreciation in value
d. Diversification opportunities
25. A borrower is offered a mortgage loan for $100,000 with an interest rate of 10% APR and a 30-year
amortization period with monthly payments. The origination fee is $1,000 and the lender charges two
discount points. What is the effective interest rate if the loan is held to maturity?
a. 11% APR
b. 9% APR
c. 10.37% APR
d. 0.86% APR
26. The advantages of attached housing include
a. lower per unit development costs.
b. lower per unit land costs.
c. less environmental impact on the site.
d. all of these
27. The internal rate of return is that discount rate at which
a. the future worth of present cash flow is exactly equal to the initial cash investment.
b. the present value of future cash flows is larger than the initial cash investment.
c. the future worth of cash flow is larger than the initial cash investment.
d. the present value of future cash flow is exactly equal to the initial cash investment.
28. How many discount points are necessary to raise the yield of a 12% APR loan with 360 monthly payments
of $514.30 to 12.42% APR? (hint - find the present value of the annuity under each interest rate, then
examine the difference!)
a. 1
b. 3
c. 2
d. 4
29. What is the primary factor leading to the selection of a second home?
a. Location relative to transportation routes
b. Employment opportunities in the area
c. Amenities
d. Family size
30. Assume that you are investigating the purchase of a 6-unit apartment building. You have estimated that the
annual after-tax cash flow (ATCF) will be $30,000 for the next 3 years. At the end of 3 years you think
you can sell the property and get an after-tax equity reversion (ATER) of $180,000. If the purchase price of
the building is $1,000,000 and the LTV ratio is 80%, what is your NPV assuming your rate of return is
12%?
a. -$599,824.62
b. -$2,051.37
c. $5,513.73
d. $175.38
e. none of the above
5
31. Given is the following information:
Net Operating Income:
$14,000
Depreciation:
$4,000
Debt Service:
$13,000
Vacancy and Credit Loss: $7,000
Interest Expense:
$12,000
Operating Expenses:
$3,000
Tax rate:
28%
Assuming that the investor can use any tax shelter benefits, what are the taxes due or the taxes saved ($$$)
for these annual figures?
a. ($1,440)
b. $580
c. ($560)
d. $1,440
32. _______ tenants are the largest tenants. They are expected to attract shoppers to the shopping center and
benefit other tenants.
a. Secondary
b. Anchor
c. Boutique
d. Specialty
33. All of the following describe the market for office towers except
a. it depends upon the level of business activity.
b. it is usually situated in or near the Central Business District.
c. it is strongly tied to white-collar employment.
d. it is primarily determined by travel costs.
34. Consider the following information regarding an ARM loan: The index for year one is 6%, the margin is
2%, the lifetime cap is 6%, the annual cap is 2%, and the first-year-only teaser is 1%. The maximum
interest rate allowable during the life of the mortgage is
a. 12%.
b. 13%.
c. 14%.
d. There is no maximum
35. Given the information in # 34, what is the first year contract rate?
a. 6%
b. 7%
c. 8%
d. 12%
36. Which of the following investment analysis measures gives the investor the best measure for overall
financial decision making?
a. Cash on cash return
b. IRR
c. Net present value
d. Payback period
6
37. The most important consideration in the selection of shopping-center sites is
a. size and shape.
b. utilities.
c. location and access.
d. topography and drainage.
38. Which of the following is not a step in the market analysis process for residential development?
a. Delineation of the trade area
b. Determining the impact of regional trends on the local market
c. Determination of possible changes in the demand factors
d. Estimation of future demand
39. The _______ shopping center caters to unusual market segments and offers high quality, high priced
merchandise in boutique-type stores.
a. specialty
b. super store
c. neighborhood
d. community
40. You cannot use the IRR as an investment criteria are when you are faced with
a. non-conventional and uneven cash flows.
b. non-conventional cash flows and mutually exclusive projects.
c. mutually exclusive and independent projects
d. positive NPV projects.
e. any project.
41. Financial feasibility analysis for a residential development
a. must be done before the local governing authorities will allow development of the property.
b. analyzes the expected cash flows of a project from conception to its anticipated sell-out.
c. is complicated by the fact that the construction loan is not repaid until several years after the project sells
out.
d. is not of any great importance to a potential lender.
42. Which of the following statements does not apply to employing the amortization method of repaying a
mortgage loan? The amount of the
a. interest payment decreases each period.
b. payment applied to principal repayment decreases each period.
c. payment applied to principal reduction increases each period.
d. interest is based on the remaining principal.
43. Assume you are getting a 30-year, monthly-payment loan for $200,000. The effective monthly interest rate
is 0.5%.
a. Your monthly payment is $7,195.78 and the interest paid in month 359 is $29,748.42.
b. Your monthly payment is $1,199.10 and the interest paid in month 359 is $11.90.
c. Your monthly payment is $1,199.10 and the interest paid in month 359 is $1,187.20.
d. Your monthly payment is $12,000 and the interest paid in month 359 is $1,311.85.
7
44. A real estate investment is expected to return to its owner $3,500 per year for 16 years after expenses. At
the end of year 16, the property is expected to be sold for $49,000. Assuming the required rate of return is
14% for investments with this degree of risk, what is the net present value of this property if the down
payment is $28,000 today?
a. ($51)
b. $27,949
c. ($90)
d. $27,210
45. Since a loan with points attached to it will typically charge a lower interest rate than a loan without points,
everything else the same, it is usually better to choose a loan with points.
a. True
b. False
46. As discussed in class, the following is true with regards to hotel development and management:
a. While Marriott is involved in the management of luxury hotels, it does not own most of the hotels it
manages.
b. Marriott specializes in the management of luxury hotels and owns most of the hotels it manages.
c. Investing in hotels tends to be less risky than investing in office buildings; therefore banks
require low down payments and low rates on loans for hotels.
d. Hotels are never operated as franchises.
47. A __________ mortgage has mortgage payments re-established once during the life of the loan.
a. two-step
b. adjustable rate
c. fixed rate
d. variable rate
48. _______ hotels cater mostly to individual vacationers and families.
a. Commercial
b. Convention
c. Airport
d. Resort
49. According to the net present value decision rule, an investor who is considering a project which has a net
present value of $1 would
a. reject the investment.
b. lose more money on the investment.
c. accept the investment.
d. be indifferent between accepting or rejecting the investment.
50. A buyer can afford no more than $500 per month in payments. The most favorable loan available in the
market is a 30 year loan at 10% APR. What is the maximum affordable house with a 10% down payment?
a. $55,000
b. $63,306
c. $59,975
d. $69,636
8
REE EXAM II Version A
--Page 10
ANSWER KEY
+-------+------+--------+------+--------+--------+--------+--------+------+
| Text | Bank | Exam |
|
| Ques | Dif
| Lrng |
|
|Chapter| Ref |Question|Answer| Type | Cat
| Lvl
| Obj
| Page |
+-------+------+--------+------+--------+--------+--------+--------+------+
| 17
2
1
c
M-Choice
|
| 15
19
2
a
M-Choice
|
| 16
6
3
c
M-Choice
|
| 15
8
4
b
M-Choice
|
| 17
1
5
a
M-Choice
|
| 17
10
6
a
M-Choice
|
| 17
9
7
c
M-Choice
|
| 17
5
8
d
M-Choice
|
| 15
1
9
b
M-Choice
|
| 17
20
10
e
M-Choice
|
| 16
21
11
b
M-Choice
|
| 14
15
12
c
M-Choice
|
| 17
19
13
c
M-Choice
|
| 15
2
14
d
M-Choice
|
| 18
1
15
b
M-Choice
|
| 17
14
16
d
M-Choice
|
| 16
2
17
a
M-Choice
|
| 15
12
18
a
M-Choice
|
| 15
11
19
b
M-Choice
|
| 15
10
20
b
M-Choice
|
| 16
13
21
b
M-Choice
|
| 15
3
22
d
M-Choice
|
| 18
11
23
c
M-Choice
|
| 16
1
24
a
M-Choice
|
| 15
16
25
c
M-Choice
|
| 17
4
26
d
M-Choice
|
| 16
8
27
d
M-Choice
|
| 15
5
28
b
M-Choice
|
| 17
17
29
c
M-Choice
|
| 16
23
30
d
M-Choice
|
| 16
11
31
c
M-Choice
|
| 18
24
32
b
M-Choice
|
| 18
5
33
d
M-Choice
|
| 15
15
34
b
M-Choice
|
| 15
14
35
b
M-Choice
|
| 16
16
36
c
M-Choice
|
| 18
13
37
c
M-Choice
|
| 17
8
38
a
M-Choice
|
| 18
20
39
a
M-Choice
|
| 16
22
40
b
M-Choice
|
| 17
11
41
b
M-Choice
|
| 15
4
42
b
M-Choice
|
| 18
9
43
b
M-Choice
|
| 15
9
44
a
M-Choice
|
| 18
17
45
b
M-Choice
|
| 18
3
46
a
M-Choice
|
| 15
17
47
a
M-Choice
|
| 18
25
48
d
M-Choice
|
| 16
15
49
c
M-Choice
|
| 15
6
50
b
M-Choice
|
+-------------------------------------------------------------------------+
9