Financial Management in Real Estate
Chapter Exam Questions
Course Introduction
Financial Management in Real Estate explores the financial principles and analytical techniques necessary for efficient decision-making within the real estate industry. The course covers topics such as property valuation, investment analysis, risk assessment, financing strategies, portfolio management, and the impact of market trends on real estate performance. Students will gain practical skills in budgeting, forecasting, and evaluating both residential and commercial real estate ventures, using case studies and real-world examples to understand financial modeling and capital structure considerations unique to this sector. Designed for those pursuing careers in real estate development, investment, or management, this course equips students with the knowledge to optimize financial outcomes in real estate transactions and long-term asset management.
Recommended Textbook
Real Estate Finance Investments 16th Edition by William B Brueggeman
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Chapter 1: Real Estate Investment: Basic Legal Concepts
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Sample Questions
Q1) A reversion and a remainder are similar in that:
A)Both can be sold or mortgaged
B)Both cause the property to go back to the grantor after the sale
C)Neither is an actual interest in the property
D)Neither is considered a future estate
Answer: A
Q2) Which of the following is FALSE concerning Mechanic's Liens?
A)Gives the right to attach a lien on real estate
B)Can get money through forcing judicial sale
C)Lasts even after the bill for labor and materials has been paid
D)Might not be disclosed by the public records
Answer: C
Q3) Which type of deed offers the grantee the MOST protection?
A)Quitclaim deed
B)Special warranty deed
C)General warranty deed
D)Officer's deed
Answer: C
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3
Chapter 2: Real Estate Financing: Notes and Mortgages
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Sample Questions
Q1) When would seller financing NOT be used?
A)The seller desires to take advantage of the installment method of reporting the gain from sale
B)The buyer does not qualify for long term mortgage credit because of low down payment or difficulty meeting monthly payments
C)Third-party mortgage financing is less expensive or easily available
D)The seller desires to artificially raise the price of the property by offering a lower-than-market interest rate on the mortgage
Answer: C
Q2) Which of the following types of bankruptcy is available to a business to reorganize and rehabilitate the debtor?
A)Chapter 7
B)Chapter 11
C)Chapter 13
D)Chapter 17
Answer: B
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Chapter 3: Mortgage Loan Foundations: The Time Value of Money
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Sample Questions
Q1) The internal rate of return:
A)Is also known as the investment of investor's yield
B)Represents a return on investment expressed as a compound rate of interest
C)Is calculated by setting the price of an investment equal to the stream of cash flows it generates and solving for the interest rate
D)Can be defined by all of the above
Answer: D
Q2) The future value of $800 deposited today would be greater if that deposit earned 8% rather than 7.75%.
A)True
B)False Answer: True
Q3) If you deposit $1,000 in an account that earns 5% per year (compounded monthly),what will the balance in the account be at the end of 5 years?
A)$1,272
B)$1,276
C)$1,280
D)$1,283
Answer: D
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Chapter 4: Fixed Interest Rate Mortgage Loans
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Sample Questions
Q1) Which one of the following is TRUE about prepayment penalties?
A)They are never used with residential mortgages
B)They lower the effective cost if the loan is repaid before maturity
C)They are equivalent to charging additional points for the loan
D)They are not included in the APR calculation
Q2) At the end of five years,calculating the loan balance of a constant payment mortgage is simply the:
A)Present value of a single amount
B)Future value of a single amount
C)Present value of an ordinary annuity
D)Future value of an annuity due
Q3) Over the life of the loan,which of the following loans would continually have a lower principal balance given each loan had the same term,principal amount,and average interest rate?
A)CAM
B)CPM
C)GPM
D)GAM
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Chapter 5: Adjustable and Floating Rate Mortgage Loans
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Q1) The default risk of a FRM is higher than the default risk of an ARM.
A)True
B)False
Q2) Given that every other factor is equal,which of the following ARMs will have the lowest expected cost?
A)An ARM with payment caps and negative amortization
B)An ARM with interest rate caps
C)An ARM with a longer adjustment interval
D)An ARM with no caps or limitations
Q3) Which of the following clauses leads to higher risk for an ARMs lender?
A)Negative amortization is not allowed when interest is not covered by the payment due to a payment cap
B)There is a floor for payments.
C)Adjustment interval is longer than one year
D)All of the above
Q4) The floor of an ARM is the maximum reduction of payments or interest rates allowed.
A)True
B)False
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7
Chapter 6: Mortgages: Additional Concepts, analysis, and Applications
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Sample Questions
Q1) Buydown loans have initial payments that are lower than they would be without the buydown provision.
A)True
B)False
Q2) A borrower has secured a 30 year,$150,000 loan at 7% with monthly payments.Fifteen years later,the borrower has the opportunity to refinance with a fifteen year mortgage at 6%.However,the up front fees,which will be paid in cash,are $2,500.What is the return on investment if the borrower expects to remain in the home for the next fifteen years?
A)6.00%
B)13.00%
C)22.62%
D)28.89%
Q3) A borrower finds that the incremental cost of borrowing an extra $10,000 is 14%.The borrower can earn 12% on alternative investments of comparable risk so he would be better off by not borrowing the extra 14%.
A)True
B)False
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Page 8
Chapter
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Sample Questions
Q1) A home sales transaction in which the seller was not under undue pressure to sell for a discounted price (e.g.,foreclosure,selling to family member,etc.)is referred to as a(an):
A)Aboveboard transaction
B)Arm's-length transaction
C)Parsed transaction
D)Tainted transaction
Q2) An appraisal usually contains three approaches to valuation.Which of the following is NOT one of those approaches?
A)The Market Approach
B)The Ratio Approach
C)The Cost Approach
D)The Income Approach
Q3) The appraised value of a property usually represents the:
A)Actual value of the property
B)Actual selling price of the property
C)Actual opinion of an appraiser
D)Actual replacement value of the property
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Page 9
Chapter 8: Underwriting and Financing Residential Properties
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Sample Questions
Q1) A conforming mortgage is one for which the US Treasury will provide credit backing through the GSEs.
A)True
B)False
Q2) RESPA requires lenders to disclose to buyers a good faith estimate of certain closing costs within:
A)One day before the real estate closing
B)Three days before the real estate closing
C)One day after loan application
D)Three days after loan application
Q3) RESPA requires a lender to disclose good faith estimates of closing costs within three days of loan application.
A)True
B)False
Q4) Which of the following groups customarily does NOT attend real estate closing?
A)The buyer and seller
B)The buyer's and seller's immediate families
C)Real estate broker(s)
D)Settlement agent(s)
10
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Sample Questions
Q1) Which of the following is FALSE regarding cap rates?
A)Excess supply tends to drive cap rates up
B)Rising interest rates generally tend to lower cap rates
C)Excess demand and falling interest rates result in lower cap rates
D)Excess demand leads to lower cap rates
Q2) Which of the following describes the function of an expense stop in a lease?
A)Expenses are stopped from increasing
B)Expenses above the stop are paid by the owner
C)Expenses above the stop are paid by the tenant
D)Expenses below the stop are paid for by the tenant
Q3) To attract anchor tenants,property owners tend to charge them lower rents.They make-up for the lower rents by charging the anchor tenant higher CAM charges.
A)True
B)False
Q4) The great majority of businesses lease the space they occupy rather than purchasing it outright.
A)True
B)False
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Chapter 10: Valuation of Income Properties: Appraisal and the Market for Capital
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Sample Questions
Q1) In the cost approach to valuation,land value can be estimated by comparing sales of vacant land that are similar to the subject land.
A)True
B)False
Q2) A property is sold for $200,000.Typical financing terms are an 85% loan with a 10% interest rate over 15 years.If the before-tax cash flow is $2,000,what is the overall capitalization rate?
A)10.96%
B)11.96%
C)19.13%
D)9.96%
Q3) The capitalization rate of a newly constructed apartment building will be more than that of a relatively old apartment building,which is comparable in all other aspects. A)True B)False
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Chapter 11: Investment Analysis and Taxation of Income Properties
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Sample Questions
Q1) Property held as a personal residence cannot be depreciated.
A)True
B)False
Q2) The rate that causes the present value of all cash inflows to equal the initial investment of a project is referred to as:
A)NPV
B)Payback period
C)TVM
D)IRR
Q3) Expense stops shift the risk of increases in expenses to the lessee while allowing the lessor to retain the benefit of any decrease in expenses.
A)True
B)False
Q4) Which of the following is FALSE regarding DCR?
A)It indicates whether NOI is sufficient to cover mortgage payments
B)It is not of concern to lenders when loan to value ratios are low
C)It is an indication of risk for the lender
D)It is derived from NOI / Mortgage Payment
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Chapter 12: Financial Leverage and Financing Alternatives
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Sample Questions
Q1) A property produces an 8.92% ATIRR on the total investment considering a tax rate of 28%.What is the maximum interest rate that could be paid on debt without causing the leverage to be negative?
A)12.39%
B)11.42%
C)6.42%
D)9.37%
Q2) An interest-only loan will provide a higher debt coverage ratio than an amortizing loan with the same interest rate.
A)True
B)False
Q3) A lender requires a 1.20 debt coverage ratio as a minimum.If the net operating income of a property is $45,000,what annual amount of debt service would provide the required debt coverage ratio?
A)$37,500 or higher
B)$37,500 or lower
C)$54,000 or higher
D)$54,000 or lower
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14
Chapter 13: Risk Analysis
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Sample Questions
Q1) If the renewal probability for a lease is assumed to be 60% and the number of months vacant would be 12 months if the lease is not renewed,what is the expected vacancy at the end of the lease?
A)4.8 months
B)7.2 months
C)9.0 months
D)12.0 months
Q2) Use of leverage always increases the amount of business risk.
A)True
B)False
Q3) When an investor performs an investigation while considering acquisition of a property,this is referred to as:
A)Investigation
B)Risk analysis
C)Due diligence
D)Acquisition analysis
Q4) The term "due diligence" refers to conducting an investigation before buying a property.
A)True
B)False
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Chapter 14: Disposition and Renovation of Income Properties
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Sample Questions
Q1) An investor purchased a building in 1982 when the building could be depreciated over 19 years.A new investor is interested in purchasing the building in 1992 when the depreciable life according to tax laws is 31.5 years.Assuming both investors are in the same tax bracket and that everything else is equal,what can be said about the after-tax cash flow received by the new investor as compared to the after-tax cash flow that would be received by the original owner of the building?
A)The new investor will have a higher after-tax cash flow because the depreciation expense will be lower
B)The new investor will have a higher after-tax cash flow because the depreciation expense will be higher
C)Both investors will have to use the 31.5 year depreciable life after 1986 so the after-tax cash flow will be equal
D)The new investor will have a lower after-tax cash flow because the depreciation expense will be lower
Q2) Increasing rents tend to increase the marginal rate of return on a property.
A)True B)False
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Page 16
Chapter 15: Financing Corporate Real Estate
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Sample Questions
Q1) If a company's space requirements are far less than what is optimal to develop on a given site,leasing would tend to be more favorable.
A)True
B)False
Q2) The real estate activities of firms that only use real estate as part of their business operations are commonly referred to as:
A)Corporate real estate
B)Real estate analysis
C)Business real estate
D)Real estate finance
Q3) If the incremental cash flows from owning versus leasing are compared without explicitly considering debt financing,these returns should be compared to the firm's cost of equity.
A)True
B)False
Q4) An operating lease does not affect a corporate balance sheet.
A)True
B)False
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Page 17
Chapter 16: Financing Project Development
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Q1) Even after obtaining permanent financing,a developer still maintains the right to alter a project's design or the level of expenditures.
A)True
B)False
Q2) In the context of a lease,percentage rents generally indicate that:
A)The tenant will pay a proportionate amount of rent for his space in comparison to the total net rentable area
B)In addition to a base rent,the lessor will receive a percentage of the tenant's cash flow above some break even point
C)The tenant will pay a rent that is a certain percentage of the national average D)None of the above
Q3) Loans made under the assumption that markets will turn around are referred to as spec loans.
A)True
B)False
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18
Chapter 17: Financing Land Development Projects
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Q1) While permitted for building projects,holdbacks are not permitted for land development projects.
A)True
B)False
Q2) It is common for a developer to hold back funds to be sure that subcontractors perform all work completely before making final payment.
A)True
B)False
Q3) It is illegal for the lender to hold back funds from the developer.
A)True
B)False
Q4) Which of the following might impact the density of housing in a land development project?
A)The price paid for the land by the developer
B)The terrain of the land
C)The target market's preferences regarding density
D)All of the above
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Chapter 18: Structuring Real Estate Investments:
Organizational Forms and Joint Ventures
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Q1) Syndications can take the form of corporations,limited partnership,or other organizational forms.
A)True
B)False
Q2) Interest and real estate tax incurred during construction of real property improvements must be:
A)Deducted from the resale price of the property
B)Included in the depreciable basis of the property
C)Expensed over the construction period
D)Not be included as value of improvements
Q3) When one investor receives cash flow to achieve a certain IRR before splitting the remaining cash flow it is referred to as:
A)IRR lookback
B)IRR preference
C)Preferred IRR
D)Adjusted IRR
Q4) C-corps have the advantage of providing a pass-through of income for tax purposes.
A)True
B)False
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Chapter 19: The Secondary Mortgage Market: Pass-Through Securities
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Q1) The secondary mortgage market enables mortgage banking companies to sell existing mortgages and thereby replenish funds with which new loans can be originated.
A)True
B)False
Q2) Under the HUD Act of 1968,the assets,liabilities,and management of secondary market operations were transferred to a completely private corporation known as "Ginnie Mae" (GNMA).
A)True
B)False
Q3) Issuers typically pledge 105 percent to 120 percent in mortgage collateral in excess of par value of the securities issued,in order to overcollateralized MBBs.
A)True
B)False
Q4) In 2008,Fannie Mae was spun off in an initial public offering as a private company. A)True
B)False
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Chapter 20: The Secondary Mortgage Market: Cmos and
Derivative Securities
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Q1) Which of the following investments in NOT a debt obligation of the issuer?
A)CMOs
B)MBBs
C)MPTs
D)MPTBs
Q2) REMICs were created in order to avoid taxes:
A)Entirely
B)At the investor level
C)At the entity level
D)No taxes can be avoided.
Q3) Subprime mortgage-backed securities generally include FHA-insured or VA-guaranteed mortgages,along with conventional mortgages.
A)True
B)False
Q4) Which of the following does NOT increase the noncredit risks of CDOs?
A)Collateral management risk
B)Certainty in average life of CDO tranches
C)Higher correlation and liquidity
D)None of the above
22
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Chapter 21: Real Estate Investment Trusts Reits
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Q1) Which of the following regarding private (unlisted)REITs is TRUE?
A)Unlisted REITs are less expensive than listed REITs
B)Unlisted REITs are less liquid than listed REITS
C)Unlisted REITs are more subject to short-term market price volatility than listed REITS
D)"List or liquidate" provisions in unlisted REITs make such REITs less risky than listed REITS
Q2) Which of the following is likely to occur upon the sale of a REIT-owned property?
A)If a capital gain is realized,the REIT can retain the gain for future investment and be taxed at the appropriate corporate capital gains tax rate
B)If a capital gain is realized,the REIT can retain the gain for future investment and be taxed at the shareholder's capital gains tax rate
C)If a capital gain is realized,the REIT can distribute the gain as a dividend to shareholders who will realize it as dividend income for individual tax reporting purposes
D)If a capital loss is realized,the loss can be passed through to individual investors
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Chapter 22: Real Estate Investment Performance and Portfolio Considerations
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Q1) When comparing investment alternatives,the standard deviation is deemed to be a measure of risk.
A)True
B)False
Q2) The NCREIF Property Index can be characterized by each of the following EXCEPT:
A)The index includes only properties with no outstanding mortgage debt
B)The information used in compiling the index is contributed by members of the NCREIF
C)The index reflects payments to both property managers and portfolio asset managers
D)All of the above are true
Q3) On January 1st,an investor purchases security A for $105.Over the next four months,dividends totaling $15 were paid on security A.On March 31st,security A was sold for $120.What is the holding period return for security A?
A)0.0%
B)14.3%
C)25.0%
D)28.6%
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Chapter 23: Real Estate Investment Funds: Structure,
performance, benchmarking, and Attribution Analysis
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Q1) Fund managers generally include a ________ policy in the fund documents specifying conditions under which investors may exit the fund.
A)recovery
B)recuperative
C)reclamation
D)redemption
Q2) Compared to stock and bond funds,real estate investment funds are typically much easier to value due to the availability of real estate appraisals.
A)True
B)False
Q3) Investors may use attribution analysis to examine why the performance of an actively managed real estate investment fund has exceeded its benchmark return.
A)True
B)False
Q4) In a well-diversified investment portfolio,the allocation of real estate investments should not exceed five percent.
A)True
B)False
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