Commercial Real Estate Finance
Question Bank
Course Introduction
Commercial Real Estate Finance explores the principles and practices involved in financing income-producing properties such as office buildings, shopping centers, apartment complexes, and industrial facilities. The course examines the various types of debt and equity financing, investment analysis, mortgage structures, underwriting standards, risk assessment, and legal considerations involved in real estate transactions. Students will also learn about the roles of lenders, investors, and intermediaries, as well as contemporary issues affecting the commercial real estate market, including financial modeling, securitization, and the impact of economic fluctuations on real estate finance.
Recommended Textbook
Real Estate Finance Theory and Practice 6th Edition by Terrence M. Clauretie
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22 Chapters
473 Verified Questions
473 Flashcards
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Chapter 1: Finance and Real Estate
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Sample Questions
Q1) Savings and Loan Associations and Mutual Savings Banks:
A) have the same form of ownership-both are stock companies
B) differ in their form of ownership-one is a cooperative,the other is a stock company are also called thrifts
C) a and c
D) none of the above
Answer: B
Q2) For the economy the concept that the amount of savings equals the total amount that is invested is referred to as:
A) the debt-equity ratio
B) not important to potential creditors because there are better methods of measuring credit worthiness
C) the savings-investment cycle
D) cash flow
Answer: C
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Chapter 2: Money Credit and the Determination of Interest
Rates
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Sample Questions
Q1) Default risk:
A) is the risk the bond issuer will be unable to pay the interest and principal on the obligation
B) means a high percentage yield (11% or higher)
C) with a 11.3% yield on a bond means that there is little risk involved in paying back the principal and interest
D) means that the interest rate can be low because the risk is high
Answer: A
Q2) Economists agree:
A) inflation stops growing after it reaches double digits
B) inflation cannot continue year after year
C) inflation,especially if it is consistent year after year,creates expectations of future inflation
D) inflation doesn't play an important role in the determination of market interest rates
Answer: C
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4
Chapter 3: Finance Theory and Real Estate
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Sample Questions
Q1) Monitoring costs do NOT include:
A) auditing the books
B) inspecting the property
C) paying property taxes
D) checking on the operations of the manager
Answer: C
Q2) If the current market price of a share of stock is $47 and the intrinsic value is $3,what is the strike price?
A) $3
B) $50
C) $44
D) $47
Answer: C
Q3) Interest rate risk for thrifts occurs partially because they:
A) issue short-term deposits
B) issue long-term notes
C) invest in long-term variable rate mortgages
D) invest in short-term mortgages
Answer: A
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Page 5
Chapter 4: The Early History of Residential Finance and
Creation of the Fixed Rate Mortgage
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Sample Questions
Q1) In Roman law the an instrument used to secure a loan was called a fiducia,which means:
A) public
B) trust
C) finance
D) secrecy
Q2) Suppose you take an FRM of $150,000 at 7.5% for 30 years.If you repay this mortgage at the end of year five,what is the outstanding balance?
A) $52,342
B) $87,071
C) $141,574
D) $141,926
E) none of the above
Q3) The effective interest charge on a loan will be effected by:
A) the APR
B) discount points
C) appraisal costs
D) none of the above
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Chapter 5: Modern Residential Finance
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Sample Questions
Q1) A maturity mismatch occurs when:
A) over one half of all mortgage debt is held by depository institutions
B) mortgage loan interest rates are high
C) a financial institution has originated more conventional loans than government insured loans
D) there is a large difference in the maturity of a financial institutions assets and liabilities
Q2) Assumable loans and carry backs:
A) have totally replaced FHA and VA financing
B) are examples of what is termed creative financing
C) are short-term loans with balloon payments
D) are two forms of FHA financing
Q3) Disintermediation refers to:
A) the withdrawal of funds from financial institutions by depositors in excess of deposits
B) financial institutions withdrawing from the Federal Reserve System
C) financial institutions shifting from FHA loans to conventional loans
D) none of the above
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Chapter 6: Alternative Mortgage Instruments
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Sample Questions
Q1) With an index rate of 8.5%,a 200 basis point margin and a life of loan cap of 5%,a fully indexed rate on an ARM is:
A) 6.5%
B) 17%
C) 10.5%
D) 13.5%
Q2) When there is an increase in the loan balance due to payments less than the interest charge on an adjustable rate mortgage,the result will be:
A) negative amortization
B) interest rate volatility
C) payment in full of the entire loan balance
D) a foreclosure
Q3) Today's mortgage market is dominated by:
A) FRMs and ARMs
B) FRMs and PLAM
C) SAMs and ARMs
D) PLAMs and SAMs
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8
Chapter 7: Financing and Property Values
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Sample Questions
Q1) The term "cash equivalent" value refers to:
A) the value of a residential property while it is listed
B) the amount of discount points charged by a lender
C) the value of a property if sold for all cash
D) the cash equivalency of the mortgage on a property
Q2) Mortgage Revenue Bonds,a class of bonds called municipals,are issued by state and local governments and:
A) allow the government to purchase property for government use
B) provide an interest rate at a higher rate than corporate bonds
C) provide interest that is free of federal taxation
D) provide interest that is free from capital gains taxation
Q3) The term "carryback financing" refers to:
A) a motivated seller who takes back a note at a low rate in order to sell the property
B) a situation where the lender takes the property back after a default on the loan
C) an assumable loan in which a lender waives the discount points in order to complete the loan transaction
D) an assumable FHA loan
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9
Chapter 8: Federal Housing Policies: Part 1
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Sample Questions
Q1) Under Federal Regulation Q,the individual states were allowed to impose a ceiling on the rates that lenders were allowed to charge on mortgages.The effect of this regulation was:
A) to keep mortgage rates low and affordable
B) that mortgage money dried up in those states when interest rates rose to cyclical peaks
C) that fewer lenders were willing to finance residential mortgages in the presence of higher paying investments
D) an increase in the number of lenders willing to finance residential mortgages because of the risk-free stability of these loans
Q2) Escrow accounts are designed to:
A) ensure that the property taxes and hazard fees are current
B) ensure the borrower that no other party can claim ownership or title to the property
C) provide for the payment of all closing costs
D) ensure that the mortgage insurance and title insurance are paid.
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10
Chapter 9: Federal Housing Policies: Part 2
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Sample Questions
Q1) One method of defining or identifying discriminating lending behavior is that discrimination is said to exist if a lender purposely intends to treat a minority group member less favorably.This is known as the:
A) effects method
B) intent method
C) practices method
D) screening method
Q2) Which of the following methods has the federal government focused on to regulate discrimination and enforce the ECOA Act?
A) effects method
B) intent method
C) practices method
D) screening method
Q3) In a perfectly competitive market,a discriminatory firm would:
A) have higher costs
B) be less efficient
C) have a lower stock value
D) all of the above
E) none of the above
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Chapter 10: The Secondary Mortgage Market
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Sample Questions
Q1) Mortgage pay-through bonds are a cross between the following two mortgage related securities:
A) pass-throughs and MBBs
B) MBBs and CMOs
C) pass-throughs and CMOs
D) none of the above
Q2) 10-40.Desirable characteristics of mortgage-related securities include:
A) credit enhancement
B) rearrangement of cash flows to meet demands of investors
C) avoiding double taxation
D) a and b
E) all of above
Q3) 10-23.A secondary mortgage transaction that occurs when a lender sells mortgages to an agency that,in turn,issues an MRS,such as a pass-through,back to the lender is referred to as
A) SWAP
B) tailor
C) collateralized mortgage obligation
D) credit enhancement
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Chapter 11: Valuation of Mortgage Securities
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Sample Questions
Q1) 11-20.In any one period (month)the cash flows from a pool of several hundred mortgages will consist of:
A) scheduled amortization of principle
B) interest on the remaining principle
C) prepayments of a portion of the pool
D) a and b only
E) a,b,and c
Q2) For a pool of mortgages (with no defaults),which of the following is false?
A) the total amount of principal (both scheduled and prepayments)that will be paid from the pool will depend upon changes in the interest rates
B) changes in the interest rate may cause the principal payments to be delayed or accelerated
C) the interest payments in any one month will depend upon the amount of principal outstanding at the beginning of the month
D) changes in the market rate of interest will affect the timing of prepayments
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Chapter 12: Controlling Default Risk Through Borrower
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Sample Questions
Q1) 12-19.The theories that explain default risk include:
A) resolution equity theory
B) equity theory
C) ability to pay theory
D) both b and c
Q2) 12-36.Which term indicates that in the event of default,the lender can require that the entire amount of the debt become due?
A) due-on-sale clause
B) due process clause
C) due payment clause
D) acceleration clause
Q3) 12-40.A provision that is typical for large residential real estate developments where land is used as collateral for a development loan is a:
A) release clause
B) conveyance clause
C) distribution clause
D) clause of dispatch
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Chapter 13: Loan Origination, Processing, and Closing
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Sample Questions
Q1) 13-41.Mortgage bankers receive income from: I.marketing rate difference.
II)warehousing rate difference.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) 13-15.A promissory note represents:
A) the borrower's promise to obtain the loan
B) the borrower's promise to repay the loan
C) a deed
D) a commitment to be a part of the closing file
Q3) 13-32.For FHA loans a lender can do virtually all of the underwriting under the:
A) verification of indebtedness program
B) loan processing program
C) direct endorsement program
D) mortgage banking program
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Chapter
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Sample Questions
Q1) Foreclosure is a process that:
A) returns the property to a borrower when the loan is paid off
B) is consistent in all states as required by federal law
C) is exercised by a buyer of the property
D) none of the above
Q2) An equitable right of redemption:
A) is allowed after foreclosure
B) allows a delinquent mortgagor to prevent foreclosure by paying delinquent interest and other costs
C) is the same as a statutory right of redemption
D) none of the above
Q3) The FHA up-front mortgage insurance premium (MIP)is:
A) refunded if the loan is subsequently assumed
B) equal to five percent of the face amount of the loan
C) can be financed under some conditions
D) none of the above
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Chapter 15: Value, Leverage, and Capital Structure
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Sample Questions
Q1) Financial leverage is:
A) the left side of the balance sheet
B) the use of debt to finance real estate
C) the use of equity to finance real estate
D) a and b
E) b and c
Q2) Using the formula ROE = [NOI - rD] /Equity,the term positive leverage implies that the return On equity is ________________ than the return on assets if the cost of debt "r" is ___________ than ROA where ROA = NOI/EQUITY.
A) greater,less
B) less,greater
C) minimal,maximized
D) a and b
E) a and c
Q3) Investors purchase multiple properties to:
A) diversify a portfolio
B) maximize investment return
C) minimize risk
D) a and b
E) all of the above
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Chapter 16: Federal Taxation and Real Estate Finance
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Sample Questions
Q1) 16-12.Section 1031 limits the amount of personality included in an exchange to ______________________ of the aggregate value of the replacement property:
A) 15%
B) 18%
C) 20%
D) 25%
E) none of the above
Q2) A test that determines if the original issue discount (OID)rules apply is the:
A) time value of money test
B) adequacy of interest test
C) risk-return test
D) a and b
E) b and c
Q3) The Tax Act of 1993 raised the marginal tax rates on ordinary income to:
A) 28%
B) 39.6%
C) 51.8%
D) 42.5%
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18
Chapter 17: Sources of Funds for Commercial Real Estate
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Sample Questions
Q1) Thrifts specialize in:
A) residential loans
B) multi-family properties
C) commercial properties
D) none of the above
Q2) The primary institutional investors in equity real estate are:
A) pension funds
B) federal credit agencies
C) unions
D) none of the above
Q3) The largest supplier of commercial real estate debt is:
A) state and local retirement funds
B) commercial banks
C) thrifts
D) pension funds
Q4) Insurance companies invest primarily in:
A) CMOs
B) commercial mortgages
C) residential mortgages
D) none of the above
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Chapter 18: Acquisition, Development, and Construction Financing
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Sample Questions
Q1) 18-12.In the event of a default,the development lender will have the rights to:
A) dollar based fees
B) impact fees
C) work materials of developer
D) recovery fee
Q2) Rolling options are popular with:
A) speculators
B) residential developers
C) lenders
D) commercial developers
Q3) 18-36.Loan-to-Value ratios for commercial projects are usually:
A) 40-50%
B) 50-60%
C) 60-70%
D) 70-80% e 80-90%
Q4) 18-38.Instead of buying land outright developers may prefer:
A) to use subdivision trusts
B) to use partial releases
C) to use release patterns
D) to use options to purchase
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Chapter 19: Permanent Financing of Commercial Real
Estate Properties
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Sample Questions
Q1) An advantage of leasing rather than owning an asset is:
A) a firm expects to use the asset for a long period of time
B) the knowledge by all market participants of the probability that the asset may become obsolete before the end of its physical life
C) the lessor can use the tax benefits from depreciation more than the lessee
D) all of the above
Q2) A sale-leaseback can be defined as:
A) a sale of the property with a lease from the new owner with an option to repurchase
B) a sale of the property with a lease from the new owner with no option to repurchase
C) a lease of the property with a subsequent sale
D) none of the above
Q3) 19-13.In an equity participation loan the lender offers a lower rate on the loan in exchange for:
A) a share of the cash flows from operations
B) a share of appreciation in the property
C) either a or b or both
D) title to the property
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Page 21
Chapter 20: Ownership Structures for Financing and Holding Real Estate
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Sample Questions
Q1) 20-12.REITs that invest in both equity properties and mortgages are called:
A) combination REITs
B) hybrid REITs
C) dual purpose REITs
D) none of the above
Q2) The following is NOT a factor that determines the best form of ownership for real estate:
A) use of debt financing
B) passive loss limitations
C) desire to retain earnings
D) future inflation expectations
Q3) 20-35.The following is one of several criteria a REIT must meet so as to be a tax-free entity:
A) derive at least seventy-five percent of income from real estate related investments
B) retain at least one-half of all income
C) can not at any time sell off real estate assets
D) none of the above
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Page 22
Chapter 21: Real Estate in a Portfolio Context
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Sample Questions
Q1) Diversification has value that results from risk reduction that occurs when:
A) the returns on the combined assets are perfectly correlated
B) the returns on the combined assets are inversely related to the business cycle
C) the returns on combined assets are uncorrelated
D) none of the above
Q2) The amount of risk reduction that occurs through the process of diversification is determined by:
A) the extent to which the returns on the assets are correlated
B) the standard deviations of the assets
C) the returns on the assets
D) the expertise of the portfolio manager
Q3) The cost of obtaining all of the information sufficient to make an informed and rational investment in real estate is termed:
A) marketability risk
B) residual risk
C) formation risk
D) liquidity risk
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23
Chapter 22: Liability, Agency Problems, Fraud, and Ethics in Real Estate Finance
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Sample Questions
Q1) One who intentionally causes injury to another is subject to liability to the other for that injury,if this conduct is generally culpable and not justifiable under the circumstances.This is referred to as:
A) prima facia tort
B) breach of contract
C) fraud
D) strict liability
Q2) The law excludes from the category of an owner or operator "a person,who,without participating in the management of a vessel or facility,holds an indicia of ownership primarily to protect his security interest in the vessel or facility." This is termed:
A) secured-lender exemption
B) strict liability
C) potentially responsible parties
D) joint and several liability
Q3) Making of a promise with no intention of fulfilling it is referred to as:
A) nondisclosure fraud
B) promissory fraud
C) tort
D) fiduciary
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