Deck 23: Real Estate Investment Funds: Structure, Performance

Question 1

During the period before a fund manager begins to physically purchase properties, investors are typically asked to make capital _______________.

A) calls
B) commitments
C) contributions
D) assurances

Answer 1

commitments

Question 2

Which of the following is NOT one of the typical categories of real estate investment funds?

A) Core funds
B) Value-added funds;
C) Growth funds
D) Opportunity funds

Answer 2

Growth funds

Question 3

A _____________ fund structure is commonly used by managers of very large, open-end funds that are expected to hold a substantial number of properties in various locations.

A) commingled
B) separate
C) conjoined
D) adjacent

Answer 3

commingled

Question 4

In a well-diversified investment portfolio, the allocation of real estate investments should not exceed five percent.

Question 5

Which type of fund structure would investment managers be likely to use in order to raise a specific amount of capital over a specific period of time?

A) open-end fund
B) closed-end fund
C) finite fund
D) liquidation fund

Question 6

Which of the following documents is used to inform real estate fund investors of the discretion that managers may exercise related to the acquisition, management, and sale of properties in the fund?

A) fund agreement
B) prospectus
C) due diligence record
D) deed of trust

Question 7

Investors may use attribution analysis to examine why the performance of an actively managed real estate investment fund has exceeded its benchmark return.

Question 8

A new real estate investment fund might feature a "lock-up period" that would prohibit investors from exiting the fund during the fund's first year or two in operation.

Question 9

The investment strategy of a fund may exclude certain markets, submarkets, and/or property categories from the fund manager's investment options.

Question 10

Opportunity funds are designed for long-term investment and, accordingly, will generally maintain ownership of acquired properties for several years.

Question 11

Which of the following is NOT a type of fee commonly charged by a real estate investment fund manager:

A) acquisition fees
B) disposition fees
C) commitment fees
D) performance fees

Question 12

Investments that are held "in trust" on behalf of a pension plan's beneficiaries cause the fiduciary duties and responsibilities of pension plan sponsors to "carry over" to managers of these real estate investment funds.

Question 13

In reporting on a fund's investment performance, managers are generally permitted to provide investors with internally performed appraisals at specific time intervals. Third-party, external appraisals are required only when a property is sold.

Question 14

Large, private funds are typically created by real estate investment managers who develop an investment strategy involving which of the following: 1) the types of properties to be acquired and markets where acquisitions will be made, 2) how the fund will be operated, 3) when properties are to be sold, and 4) how the fund strategy will align with the real estate investment requirements of investors.

A) 1, 2, 3
B) 1, 2, 4
C) 2, 3, 4
D) All of the above

Question 15

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

Question 16

___________ funds take on risks by conducting ground up development projects that expose the funds to additional construction risks, such as entitlements, construction delays, cost overruns, complex JV management issues, and so on, and use a relatively high degree of financial leverage.

A) Core
B) Opportunity
C) Value-add
D) Core Plus

Question 17

A core strategy typically uses the type of fund structure under which new investors may be admitted after the initial offering and after the commencement of fund operations. These funds are referred to as:

A) closed-end fund
B) finite fund
C) liquidation fund
D) open-end fund

Question 18

Compared to stock and bond funds, real estate investment funds are typically much easier to value due to the availability of real estate appraisals.

Question 19

Unrealized returns are important to investors in assessing the performance of their investments and of their fund managers).

Question 20

When reporting on a real estate investment fund, a manager may treat the financial information as an estimate of performance based on the assumption that all of the underlying properties could be sold at their appraised value.

Question 21

Fund flows that occur within a quarterly reporting period are referred to as _______________ cash flows.

A) inter-period
B) intra-period
C) regular
D) irregular

Question 22

When comparing investment returns at the fund level against those at the property level, the difference between them is referred to as ___________________.

A) fund drag
B) performance lag
C) leverage drag
D) administrative drag

Question 23

Which of the following is NOT a measure of risk related to real estate investment funds?

A) Tracking error
B) Beta
C) TWR
D) Jensen's Alpha

Question 24

_____ is the rate that causes the present value of all cash flows from a property including its resale value) to be equal to the original purchase price of the property.

A) IRR
B) NPV
C) TWR
D) TVM

Question 25

Given the following fee structure, what is the total amount of fees that would be paid to a fund manager if the actual NOI was $45 million annually: 5.5% up to $20 million in annual NOI
5)0% for the next $35 million in annual NOI
4)5% for the next $45 million in annual NOI
4)0% for all over $45 million in annual NOI

A) $2.3 million
B) $1.1 million
C) $2.0 million
D) $1.8 million

Question 26

For real estate investment funds in which the manager has little control over the flow of cash into and out of the fund, the preferred performance measure is _________.

A) NPV
B) IRR
C) TVM
D) TWR

Question 27

If a fund manager has the opportunity to receive a fee as an added incentive to enhance the performance of the fund, the amount of the fee may be based on the extent to which the performance of the fund exceeds an agreed upon hurdle rate of return. Such a fee is referred to as a:

A) Bonus
B) Hurdle fee
C) Fiduciary fee
D) Promote

Question 28

What is the expected return for a real estate investment fund with a Beta of 1.87, given a risk free rate of 2.7% and an expected return of 11.2% for the market?

A) 18.6%
B) 11.2%
C) 15.9%
D) 2.7%

Question 29

A property was acquired for $950,000 and then produced cash flows of $100,000, $120,000, $135,000, $135,000, and $125,000 at the end of years one through five, respectively. The property was then sold for $1,200,000 at the end of the fifth year. What was the internal rate of return for this investment?

A) 16.0%
B) 16.5%
C) 15.5%
D) 12.8%