Fina 3387 Real Estate Finance Exam 1 Spring 2015

Name:_____________________________________
ID:)_____________________________________
Multiple choice (3 points each)
1. The categories of real estate returns are:
a. Cash Flow
b. Price Appreciation
c. Tax Shelter
d. Equity Buildup
e. All of the above
2. When accumulated depreciation is subtracted from the owner's investment in a
property (which includes the portion bought with debt), the resulting figure is
termed the:
a. Initial Equity
b. Deferred Equity
c. Taxable Income
d. Taxable Basis
e. None of the above
3. The two sources of price appreciation are real price changes and:
a. Nominal price changes
b. Deflation
c. Inflation
d. Hedging
e. None of the above
4. Positive leverage occurs when:
a. The cost of debt is less than the total return on the asset
b. The cost of debt is more than the total return on the asset
c. The cost of debt is equal to the total return on the asset
d. The cost of debt is not considered in the analysis
e. None of the above

5. Which of the following is NOT a Source of Return on Direct Real Estate?

a. Tax shelters
b. Appreciation in value net of transaction costs
c. IRR
d. Rent
e. All of the above are sources of return
6. Economic risks are usually:
a. Completely negotiable
b. Somewhat negotiable
c. Completely controllable
d. Completely uncontrollable
e. None of the above
7. More leverage has the following impact on the variability of returns:
a. Decreases it slightly
b. Increases it
c. Does not affect it
d. Decreases it considerably
e. None of the above
8. The maximum price a buyer would pay or the minimum price a seller would
accept on a property of interest is called:
a. Exchange value
b. Market Value
c. Investment Value
d. Use Value
e. None of the above
9. Which of the following items does not directly impact the definition of Highest &
Best Use?
a. Financially feasible
b. Physically possible
c. Easily amortizable
d. Reasonably probable
e. They all directly impact the definition

10.Equilibrium value:
a. Is always the Market Value
b. Is never the Market Value
c. Is always the Liquidation Value
d. Is sometimes the Liquidation Value
e. None of the above
11.Of Surface Parking Lots, Single Story Retail and Hi Rise Hotel property types, the
following statement is generally true:
a. Single Story Retail has the lowest improved site values and the highest option
value
b. Hi Rise Hotels have the highest improved site values and the highest option
value
c. Surface Parking Lots have the lowest improved site values and the
highest option value
d. Hi Rise Hotels have the lowest improved site values and the highest option
value
e. None of the above
12.An insurance company will consider __________ as an objective of the valuation
opinion.
a. Cost of replacement
b. Cost of reproduction
c. Cost of lease-up or absorption
d. Cost of physical and functional depreciation
e. All of the above
13.Of all the below, the __________ method is most accurate in estimating the cost
new.
a. Comparative unit
b. Indexed cost update
c. Unit in place
d. Quantity Survey
e. None of the above
14.The __________ method of valuation can be used only if the building is fairly new
(less than 10 years).
a. Comparative unit

b. Indexed cost update

c. Unit in place
d. Quantity Survey
e. None of the above
15.In the __________ method of valuation the cost as new of building is found by
taking bids from subcontractors on all building components and summed along
with general contractor fees and normal development fees.
a. Comparative unit
b. Indexed cost update
c. Unit in place
d. Quantity Survey
e. None of the above
16.Which types are considered while deducting accrued depreciation from the cost
as new:
I. Physical
II. Locational or External
III. Functional
a. I
b. I & II
c. II & III
d. I & III
e. I, II & III
17.The minimum number of comps is __________ on a form report.
a. 2
b. 3
c. 4
d. 5
e. 10
18.While adjusting the comps to make the price equivalent to subject property,
__________ has the maximum impact.
a. Financing
b. Quality
c. Size
d. Location

e. Time

19.New properties generally commands a premium in the market of __________ over

resales (keeping all else the same).
a. 1% to 2%
b. 5% to 6%
c. 10% to 13%
d. 15% to 20%
e. There is no premium
20.Market value approach works best when which of the following conditions are
met:
i.

There are many similar properties in the submarket

ii. Transactions occur frequently in the submarket

iii. The market is relatively stable over time
iv. Information is available on all the factors influencing property value
a. i & ii
b. i & ii
c. iii & iv
d. i, ii, iii & iv
e. ii & iii
21.If there are three comps then any weight that is less than __________ means the
comp is not valid comp.
a. 3%
b. 7%
c. 10%
d. 25%
e. All comps should have equal weight
22.Which of the following cannot be shown as operating expenses?
a. Leasing commissions
b. Property taxes
c. Management expenses if owner self-manages the property
d. Utilities paid by tenants
e. Advertising expenses

23.Which is the single most important estimate for the income approach to value?

a. Gross Rent
b. Effective Gross Rent
c. Net operating income
d. Cash flow before taxes
e. Expense ratio
24.The higher the LTV (loan to value) ratio, the:
a. Lower the risk to lender
b. Lower the volatility of cash returns to equity for owner
c. Higher the expectation of return to equity investor
d. Lower the break even point
e. None of the above
25.Which of the following gives the maximum allowable vacancy for property to be
able to take care of all the cash needs?
a. Expense ratio
b. Debt coverage ratio
c. Cash on Cash
d. Return on asset
e. Break even point
26.Cash on cash and cap rate return would be identical only if:
I.

Property is 100% equity

II. Break even point is 1.0

III. LTV=0.5 (debt = equity)
a. I
b. II
c. III
d. II & III
e. None of the above

27.Which of the following gives an indication on initial (going-in) profitability of a

property?
a. Expense ratio
b. Debt coverage ratio
c. Cash on Cash
d. Return on asset
e. Break even point
28.In calculating the reversion value, the NOI in the year following the sale is
typically divided by the:
a. Cash rate
b. Internal Rate of Return
c. Equity Base
d. Required Rate of Return
e. None of the above
29.Which of following expenses is a function of tenant turnover?
a. Leasing commissions
b. Property insurance
c. Property taxes
d. Parking lot maintenance
e. Roof repair
30.The dispersion in estimation of market value are due to:
i.

Omitted variables

ii. Calculation errors

iii. Random error or noise
a. i
b. ii
c. ii & iii
d. i & ii
e. i & iii
Short answer
31.Define the elements required in the definition of H&B use. (5 POINTS)
ANSWER

The highest and best use of a property is as the reasonably probable and legal
use of vacant land or improved property, which is physically possible, appropriately
supported, financially feasible, and that results in the highest value as of the date of
the appraisal.
Reasonably probable: The speculation should not be too far in the future. If we
speculate too far into the future then we have less confidence that we can predict
the likely uses for the site.
Legal use: The use should be legally possible on that land location. If a change in
the land use regulations is possible with reasonable probability, say 90% or more,
then considering a change of use that is inconsistent with current laws might be
part of the analysis. If the change in legal constraints is not likely to be approved
without high legal costs then the current legal controls should not be ignored.
Physically probable: The anticipated use should be physically possible on the land
location. It would depend on the slope of the land, subsoil, surrounding influences
on construction methods, and current technology, materials and design.
Financially feasible: The analyst must be able to be creative enough to spot
opportunities and trends that might produce higher site values. And they must
assume that investor/developers will also be able to see these same opportunities
and last, they must be able to determine if and when new alternative uses will be
successful or financially feasible.
32.Briefly describe the four steps of cost approach to value.
ANSWER
Step 1: Estimate the land value based on land as if vacant .
Step 2: Estimate the structure cost new either as replacement (cheapest) or
reproduction (identical replica). Estimate may use the comparative unit method
based on recent similar structures, indexed cost update usually based on current
cost per sqare foot for similar structure, and unit- in-place each component of the
structure is is estimated.
Step 3:

Estimate the lease up or absorption cost to bring the building to full

occupancy
Step 4:

Deduct accrued depreciation to account for physical depreciation wear

and tear of existing structure. Also functional depreciation for layout, function,
design that dosent allow existing structure to compete with newer similar
structures.