Real Estate Economics
Review Questions
Course Introduction
Real Estate Economics explores the economic principles and analytical methods applied to the real estate industry, emphasizing the factors that influence property markets, values, and development patterns. Students will learn about the determinants of demand and supply for various types of real estate including residential, commercial, industrial, and public properties while investigating demographic trends, government policies, and urban growth. The course covers real estate cycles, market structure, and the roles of financing and investment, equipping students with a comprehensive understanding of how economic forces shape real estate outcomes and decisions.
Recommended Textbook
Real Estate Finance and Investments 13th Edition by William Brueggeman
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Page 2
Chapter 1: Real Estate Investment: Basic Legal Concepts
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Sample Questions
Q1) What term BEST describes a person that owns a property and is conveying title to the property to another person?
A) Mortgagor
B) Grantor
C) Mortgagee
D) Grantee
Answer: B
Q2) 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
Q3) 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
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Page 3
Chapter 2: Real Estate Financing: Notes and Mortgages
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Q1) Which of the following terms refers to the prohibition of the commencement or continuation of collection proceedings during a bankruptcy proceeding?
A) Preferential transfer
B) Deficiency judgment
C) Automatic stay
D) Extension
Answer: B
Q2) A senior mortgage holder is owed a mortgage balance of $140,000 and brings a foreclosure suit which includes all junior claimants in the suit.If the senior mortgage holder purchases the property for $140,000 at the foreclosure sale,what happens to the claim of the junior claimants?
A) The liens of the junior claimants are unaffected and the debt is due upon sale.
B) The liens of the junior claimants are extinguished,but the debt owed to the junior claimants is unaffected.
C) The liens of the junior claimants and the debt owed to them are extinguished.
D) The liens of the junior claimants are unaffected,but the debt owed to them is extinguished.
Answer: B
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Chapter 3: Mortgage Loan Foundations: The Time Value of Money
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Sample Questions
Q1) An investment may have more than one internal rate of return.
A)True
B)False Answer: True
Q2) Begin with a single sum of money at period 0.First,calculate a future value of that sum at 12.01%.Then discount that future value back to period 0 at 11.99%.In relation to the initial single sum,the discounted future value:
A) is greater than the original amount.
B) is less than the original amount.
C) is the same as the original amount.
D) cannot be determined with the information given. Answer: A
Q3) The future value of a $1 annuity compounded at 5% annually is greater than the future value of a $1 annuity compounded at 5% semi-annually.
A)True
B)False Answer: False
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Page 5
Chapter 4: Fixed Interest Rate Mortgage Loans
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Sample Questions
Q1) Borrowers with fixed rate mortgages generally benefit if actual inflation is higher than expected inflation.
A)True
B)False
Q2) Prepayment penalties increase the lender's mortgage yield and discount points decrease it.
A)True
B)False
Q3) Because its payment stream looks like a staircase,which loan is sometimes referred to as "stepped-up" financing due to prearranged payment increases?
A) CAM
B) CPM
C) GPM
D) ARM
Q4) The APR for a loan assumes it is prepaid after ten years.
A)True
B)False
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6
Chapter 5: Adjustable and Floating Rate Mortgage Loans
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Q1) In order to calculate the APR for an ARM,you must,
A) only use the first year's given interest rate.
B) estimate interest rates over the life of the loan.
C) assume the worst case scenario and use interest rates at their highest possible point over the life of the loan.
D) use only the first five year's interest rates because they can easily be estimated and most people only own a property for five years.
Q2) ARMs help lenders combat unanticipated inflation changes,interest rate changes,and a maturity gap.
A)True
B)False
Q3) Given that every other factor is equal,which of the following ARM will have lowest expected cost?
A) ARM with payment caps and negative amortization.
B) ARM with interest rate caps.
C) ARM with longer Adjustment interval.
D) ARM with no caps or limitations.
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Chapter 6: Mortgages: Additional Concepts, Analysis, and Applications
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Sample Questions
Q1) A loan with biweekly payments will have more interest than a monthly loan with the same interest rate and loan term.
A)True
B)False
Q2) The cash equivalent value of a house that sold with favorable financing is usually less than its sale price.
A)True
B)False
Q3) Buydown loans have initial payments that are lower than they would be without the buydown provision.
A)True
B)False
Q4) 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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Chapter 7: Single-Family Housing: Pricing, Investment, and Tax Considerations
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Sample Questions
Q1) The appraisal function is purely objective;an appraiser's judgment is not part of the decision process.
A)True
B)False
Q2) Federal income tax policy has generally been thought to:
A) discourage homeownership
B) encourage renting
C) increase interest rates
D) encourage homeownership
Q3) A housing bubble occurs when there is a big increase in the supply of homes.
A)True
B)False
Q4) Which of the following would NOT result in an increase in housing demand?
A) population growth
B) employment growth
C) higher interest rates
D) higher household income
Q5) A location quotient is the ratio of total employment to base employment.
A)True
B)False
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Chapter 8: Underwriting and Financing Residential Properties
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Sample Questions
Q1) FTL and RESPA essentially say the same things.
A)True
B)False
Q2) The APR estimate must be accurate only to the nearest ______________ percent.
A) 1/2
B) 1/4th
C) 1/8th
D) 1/16th
Q3) RESPA requires lenders to disclosure to buyers a uniform settlement statement detailing all 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.
Q4) One of the objectives of RESPA was to disclose kickbacks and unearned fees on the settlement sheet.
A)True
B)False
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Chapter
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Sample Questions
Q1) What is does an expense stop do in a lease?
A) Stops expenses 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
Q2) A clause in a non anchor tenant's lease requiring the presence of an anchor tenant is referred to as a
A) Non-compete clause
B) Co-tenancy clause
C) Joint tenancy clause
D) Anchor clause
Q3) A gross lease is where tenants pay all expenses.
A)True
B)False
Q4) The term "percentage rent" refers to rent paid as a percent of space leased.
A)True
B)False
Q5) Overage rent is rent that exceeds expenses.
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) The discount rate is a rate that a typical investor would normally require as a(n)__________ return over investment holding period.
A) Maximum
B) Risk free
C) Expected
D) Historical
Q2) Which is not normally considered when conducting an appraisal using the cost approach?
A) Functional obsolescence
B) Effective age
C) Capitalization rate
D) Replacement cost
Q3) A gross income multiplier can be calculated by dividing the gross income by the sales price.
A)True
B)False
Q4) Appraisers use bracketing in order to estimate the upper and lower range of value.
A)True
B)False
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Chapter 11: Investment Analysis and Taxation of Income Properties
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Sample Questions
Q1) A property that produces a level of NOI of $200,000 per year is expected to be sold in year 5 for $2,000,000.If the property was purchased for $2,000,000,what percent of the IRR can be attributed to the operating income only?
A) 10.0%
B) 90.0%
C) 37.9%
D) 63.1%
Q2) Which of the following is NOT true for an expense stop:
A) All operating expenses are covered by the stop
B) The passthrough is based on the tenants' percentage of total leasable area
C) Expenses to be included must be agreed upon and included in the lease
D) The stop is often based on the actual amount of operating expenses at the time the lease is signed
Q3) When calculating the adjusted IRR the cash flows are always discounted to a present value at a safe rate.
A)True
B)False
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Page 13
Chapter 12: Financial Leverage and Financing Alternatives
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Q1) Which of the following is NOT a benefits of a Sale Leaseback of land for investors?
A) It is a way of effectively obtaining 100% financing
B) The lease payments are tax deductable
C) Land can not be depreciated for tax purposes
D) The land value may increase over the holding period.
Q2) Everything else equal,the loan balance on a negative amortization loan will be less than that on an interest-only loan after the first year.
A)True
B)False
Q3) 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%
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14
Chapter 13: Risk Analysis
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Sample Questions
Q1) A property with a higher standard deviation and a higher return is preferable to a property with a lower standard deviation and a lower return.
A)True
B)False
Q2) In general,real estate is usually considered more risky than bonds but less risky than stocks.
A)True
B)False
Q3) An investor is analyzing the risk of a possible investment by producing three different scenarios.Under a pessimistic scenario,the property would produce a BTIRRp of 8%;a most-likely scenario produces a BTIRRp of 12%.The investor assigns the pessimistic scenario a 25% chance of occurring,the most-likely case a 60% chance of occurring and the optimistic scenario a 15% chance of occurring.What is the standard deviation of the returns?
A) 0.01249
B) 0.0090
C) 0.000156
D) 0.0949
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15
Chapter 14: Disposition and Renovation of Income Properties
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Sample Questions
Q1) Given the same expectations for future rents and expenses,a new buyer may earn a different after-tax return than the current owner of the same property.
A)True
B)False
Q2) Which of the following factors would NOT be considered when an investor is trying to decide whether to hold or sell a property at the end of year five?
A) After-tax operating income in year five
B) After-tax cash flow from the sale in year five
C) After-tax cash flow from sale in the future
D) After-tax operating income after year five
Q3) Which of the following is NOT a benefit to Refinancing?
A) Allows investor to increase financial leverage.
B) It is an alternative to sale of the property.
C) Risk is decreased
D) No taxes have to be paid on funds received by additional borrowing.
Q4) In general,equity buildup tends to lower the marginal rate of return of holding a property.
A)True
B)False
Page 16
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Chapter 15: Financing Corporate Real Estate
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Sample Questions
Q1) An operating lease does not affect a corporate balance sheet.
A)True
B)False
Q2) A company can diversify its business activities by developing,owning and subsequently leasing real estate to other companies.Because of the diversification benefits,shareholder value is always increased.
A)True
B)False
Q3) Which of the following is FALSE,concerning operating leases?
A) It is recorded as present value of lease on the balance sheet.
B) It does not have any real effect the balance sheet.
C) It must not extend for at least 75 percent of the asset's life.
D) It is usually the preferred form of accounting for leases.
Q4) Similar to decisions about owning or leasing equipment,the decision to own or lease a property is basically just a choice between two financing alternatives.
A)True
B)False
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17
Chapter 16: Financing Project Development
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Q1) Besides an estimate of costs,a construction loan submission package includes many other components.Which of the following would NOT be one of those components?
A) Pro Forma Statement of Cash Flows for an investor's portfolio
B) Pro Forma Statement of Cash Flows
C) Pro Forma Operating Statement
D) Ratio and Sensitivity Analysis
Q2) 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
Q3) Construction loans provide the money to construct a building and are usually provided by life insurance companies or pensions funds.
A)True
B)False
Q4) Permanent financing commitments usually allow the lender to approve major leases.
A)True
B)False
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Chapter 17: Financing Land Development Projects
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Q1) An analysis of whether land can be purchased and developed profitably is known as
A) Financial Analysis
B) Feasibility Study
C) Turnkey Study
D) Project Profitability
Q2) Which of the following costs should NOT be included in a net present value analysis of a land development project?
A) Land purchase price
B) Property tax
C) General overhead such as personnel costs
D) Developer's profit
Q3) 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
Q4) It is illegal for the lender to hold back funds from the developer.
A)True
B)False
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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) A syndicate that raises capital before identifying any or all of the properties it will eventually own is known as a __________.
A) Safe harbor
B) Accredited investor
C) Caveat
D) Blind pool
Q3) 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 depreciable basis of the property
C) Expensed over the construction period
D) Not be included as value of improvements
Q4) Tax losses can not be allocated to partners in a syndication.
A)True
B)False
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Chapter 19: The Secondary Mortgage Market: Pass-Through Securities
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Q1) A mortgage pass-through security represents an undivided ownership interest in a pool of mortgage held by a trustee.
A)True
B)False
Q2) Ceteris paribus,the more seasoned a mortgage is:
A) thegreater the likelihood of prepayment.
B) thegreater the likelihood of default.
C) thegreater the likelihood that the mortgage will be carried to maturity.
D) allof the above.
Q3) The pass-through rate is the coupon rate of interest promised by the issuer of a pass-through security to the investor.In most instances,the pass-through rate is:
A) equal to the average rate of interest on all mortgages in the underlying pool.
B) lower than the lowest rate of interest on any mortgage in the underlying mortgage pool.
C) higher than the highest rate of interest on any mortgage in the underlying mortgage pool.
D) None of the above.
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Page 21
Chapter 20: The Secondary Mortgage Market: Cmos and
Derivative Securities
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Q1) In CDOs both equity and debt holder prefer riskier,higher-yielding collateral to collect excess spreads.
A)True
B)False
Q2) Which of the following is NOT a CMO security type?
A) A repeat floater
B) A Z tranche
C) An inverse floater
D) An IO tranche
Q3) Which of the following investments in NOT a debt obligation of the issuer?
A) CMOs
B) MBBs
C) MPTs
D) MPTBs
Q4) A CMO does not completely eliminate prepayment risk.
A)True
B)False
Q5) CDOs often include "B" notes,mezzanine debt and preferred equity as investments
A)True
B)False
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Chapter 21: Real Estate Investment Trusts Reits
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Q1) An investor pays $63.00 per share for stock in a given REIT.The REIT declares a dividend of $4.00 per share and has an EPS of $2.37.Considering the recovery of capital (ROC),what is the new cost basis of the stock acquired by the investor?
A) $60.63
B) $61.37
C) $63.00
D) $64.63
Q2) The early growth of the REIT industry in the 1970s was mainly attributed to which of the following?
A) Popularity of mortgage trusts.
B) Deregulation of the industry.
C) Declined performance of other investments.
D) Increased value of real property throughout the country.
Q3) Which of the following is NOT a requirement of REITs?
A) A REIT must have at least 100 stockholders
B) Not more than 50% of a REIT's shares can be owned by five or fewer shareholders
C) At least 95% of a REIT's income must be distributed to shareholders
D) All of the above are REIT requirements
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Page 23
Chapter 22: Real Estate Investment Performance and Portfolio Considerations
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Q1) An investor in a mortgage REIT is basically buying equity shares of an entity whose assets are mainly mortgages.
A)True
B)False
Q2) You would get the greatest amount of diversification if two securities are
A) positively correlated
B) negatively correlated
C) notcorrelated
D) perfectly correlated
Q3) The optimal portfolio is obtained by combining a group of securities which,by themselves,offer the highest returns with the lowest risk.
A)True
B)False
Q4) If two securities have the same positive mean returns and they are perfectly,negatively correlated,an investor in such securities will earn a positive return with zero risk.
A)True
B)False
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