Deck 21: Managing Residential Rental Property

Question 1

Real estate asset managers perform certain functions that would not be expected of asset managers who deal with stock and bond portfolios. Which of the following functions would you expect both asset managers in real estate as well as stocks / bonds to perform?

A) Find specific assets in which the owners/client can invest
B) Monitor asset performance
C) Negotiate the acquisition price of assets
D) Oversee due diligence and closing

Answer 1

B

Question 2

Leases are considered the engines that drive property values. Therefore, it should not be surprising that owners of commercial property may seek an independent leasing broker to focus on finding tenants to lease space. In exchange for their services, leasing brokers are paid a commission based on what percentage of the face amount of the lease?

A) 0.5 to 1.5%
B) 3 to 5%
C) 7 to 10%
D) 15 to 20%

Answer 2

B

Question 3

For residential properties, the ratio of prospective rent to gross monthly income is a valuable screening tool in judging a potential tenant's ability to fulfill rent obligations. Generally, this ratio should not exceed:

A) 10%
B) 20%
C) 30%
D) 40%

Answer 3

C

Question 4

Commercial real estate returns are determined in no small part by how well the ongoing management function is performed. Management decisions can be classified into two categories: property management and asset management. Which of the following functions would be considered a primary responsibility of an asset manager?

A) Property acquisitions and dispositions
B) Marketing a property to prospective tenants
C) Maintaining the condition of the property
D) Signing leases

Question 5

When property managers are looking to secure a mix of tenants for which "the whole is greater than the sum of its parts," or in other words a group of tenants that shares similar characteristics such that the experience of living together is mutually beneficial, they are seeking what is referred to as:

A) permanence potential
B) synergism
C) rehabilitation
D) adaptive reuse

Question 6

In contrast to maintenance and repair expenditures, which are operating expenses, the improvement decision generally involves a capital expenditure meant to increase the value of the structure. Which of the following classifications of improvements calls for the restoration of a property to satisfactory condition without changing the floor plan, form, or style of the structure??A. Rehabilitation
B) Remodeling
C) Adaptive reuse
D) Conversion

Question 7

Despite the magnitude of their real estate holdings, many non-real estate corporations have historically expended little effort to manage these assets effectively. Recently, the development of which of the following markets has helped to quell concerns related to this issue?

A) Commercial mortgage backed securities (CMBS)
B) Sale-leaseback
C) Tenancy-in-common (TIC)
D) Installment sale

Question 8

Both owners and managers must carefully designate their responsibilities in the management agreement. In a management agreement, all of the following would typically be responsibilities of the property manager EXCEPT:

A) Maintenance of financial accounts for money collected from tenants
B) Liability
C) General property management
D) Reports on property performance

Question 9

The lease is a contract between the owner and the tenant that transfers exclusive use and possession of the space to the tenant in return for rent or other consideration. In this arrangement, the owner is referred to as the:

A) lessor
B) lessee
C) agent
D) benchmark

Question 10

With a performance-based management contract, an asset manager's fees are tied directly to the rate of return earned by investors on the portfolio of managed properties relative to a benchmark. In private commercial real estate, the choice of benchmarks for performance is limited in large part to return indices provided by which of the following organizations?

A) Standard and Poor's
B) National Association of Real Estate Investment Trusts
C) National Council of Real Estate Investment Fiduciaries
D) Wilshire Associates

Question 11

When leasing nonresidential properties, owners would prefer to rent exclusively to high quality tenants. Such owners will tend to seek out companies whose general debt obligations are rated "investment grade" by one or more of the U.S. rating agencies. These potential tenants are more commonly referred to as:

A) tenant reps
B) credit tenants
C) tenant mix
D) in-house leasing agents

Question 12

While some property owners choose to perform both the property and asset manager functions themselves, many commercial property owners choose to employ professional property managers instead. The property manager works under a management contract in which the manager is empowered to serve as the owner's fiduciary. This type of relationship is more commonly referred to as a(n):

A) agency relationship
B) open listing relationship
C) joint-venture
D) correspondent relationship

Question 13

Maintenance and repair of a property is an ongoing process that can be divided into four principal categories. Which of the following classifications includes ordinary repairs to a building on a day-to-day basis (e.g. repairing a broken window, fixing a leaking roof)?

A) Custodial maintenance
B) Corrective maintenance
C) Preventive maintenance
D) Deferred maintenance

Question 14

The real estate industry applies which of the following labels to individuals who are responsible for the decisions that affect the physical, financial, or ownership structure of the property.

A) Asset manager
B) Property manager
C) Leasing manager
D) Regional manager

Question 15

While college-level courses are not widely available, a number of professional and trade organizations exist in the field of property management. Which of the following certifications awarded by the Institute of Real Estate Management is aimed at individuals who manage larger, residential, office, industrial, or retail properties?

A) Certified Property Manager (CPM)
B) Accredited Resident Manager (ARM)
C) Real Property Administrator (RPA)
D) Member of Appraisal Institute (MAI)

Question 16

Unlike many publicly traded stock and bond investments, commercial real estate investments:

A) can be bought and sold in highly liquid markets.
B) yield maximized returns when assets are held for short periods of time.
C) yield returns generated mostly from the asset's net operating income, rather than price appreciation.
D) have going-in and going-out transaction costs that are low (as a proportion of asset value).

Question 17

Concerned with a potential information asymmetry problem, state legislators have been proactive in passing legislation that protects the rights and interests of tenants within which of the following property types?

A) Office
B) Retail
C) Industrial
D) Apartment

Question 18

The management agreement provides for a management fee that is usually in the range of 3 to 6% of which of the following measures of property income?

A) Potential gross income
B) Effective gross income
C) Net operating income
D) Income tax liability

Question 19

A property management contract establishes an agency relationship between the manager and the owner. Considering that the management fee is often calculated as a percentage of gross income, this would seem to create an agency problem in that the agreement does not give managers the incentives to control operating expenses while they attempt to increase rental income. Though seldom the case, basing the property management fee on which of the following measures would, in theory, better align the interests of the owner and manager?

A) Effective gross income
B) Net operating income
C) Miscellaneous income
D) Capital expenditures

Question 20

An owner whose property is in a strong market position, where fewer services can be offered to tenants for the same dollar of rental income and where the owner will not lose tenants if the property is under-maintained, is said to participate in a market that has:

A) a relatively elastic demand for space
B) a relatively inelastic demand for space
C) economies of scale
D) diseconomies of scale

Question 21

Given the following information, calculate the leasing agent's commission in dollar terms. Lease Term: 10 years, Monthly Rent: $5,000, Commission: 3%.
A) $1,500

A) $150
C) $1,800
D) $18,000

Question 22

Which of the following classifications of property maintenance includes a program of regular inspections and care to avert potential problems.

A) Custodial maintenance
B) Corrective maintenance
C) Preventive maintenance
D) Deferred maintenance

Question 23

Suppose an owner is trying to decide whether or not to make improvements to her property. Given the following information, what would be the value added or potential loss if the improvements are undertaken? Current rent per square foot: $8.75, Anticipated rent per square foot: $14.50, Cost of improvements: $250,000, Square feet: 34,000.

A) Gain of $54,500
B) Loss of $54,500
C) Gain of $195,500
D) Loss of $195,500

Question 24

The real estate industry applies which of the following labels to individuals who are responsible for the day-to-day operations of the property.

A) Asset manager
B) Property manager
C) Leasing broker
D) Tenant

Question 25

When property managers are looking to lease residential units to households whose prior history indicates a probability of long-term occupancy, they are seeking what is referred to as:

A) permanence potential
B) synergism
C) rehabilitation
D) adaptive reuse

Question 26

Someone shopping for a new suit at a department store is much more likely to stop at a nearby shoe store than a nearby bakery or drugstore. This scenario highlights the importance of which of the following determinants of the income-producing ability of the property?

A) Tenant mix
B) Preventive maintenance
C) Rehabilitation
D) Professional designation

Question 27

Which of the following classifications of property maintenance includes the day-to-day cleaning and upkeep required to maintain value and tenants?

A) Custodial maintenance
B) Corrective maintenance
C) Preventive maintenance
D) Deferred maintenance

Question 28

In evaluating potential tenants for residential rental properties, a landlord may be interested in calculating the ratio of prospective rent to income for the applicant. Given the following information, calculate the rent to income ratio for the applicant. Applicant's Gross Annual Salary (Income): $45,000; Prospective Monthly Rent: $1,000; Applicant's Annual Income Tax and Benefit Payments: $7,650.

A) 2.22%
B) 2.68%
C) 26.67%
D) 32.13%

Question 29

The property manager works under a management agreement between the property owner and the property management firm. As compensation for his duties, the property manager will negotiate a management fee. Given the following information, calculate the dollar compensation to the property manager in year 1. Potential Gross Income of the property: $250,000; Vacancy and Collection Losses: 15%; Miscellaneous Income: $50,000; Management Fee: 3%.

A) $4,875
B) $6,375
C) $7,500
D) $7,875

Question 30

Suppose that a property owner plans on spending $15,000 per year over the next 5 years on maintenance and repairs. However, if she does not spend this amount, she will not be able to keep rents at market levels, vacancies will increase, and the resale value of the property in 5 years will be lower. Assume that she would lose about $7,000 a year in net income and would realize a loss of $85,000 in lower property value at the time of sale if maintenance is not maintained on the property. Determine the difference between the present value of the cost of maintaining the property and the loss to the owner if the property is not maintained assuming that the owner could earn a 7 percent return on any funds not invested in maintenance and repairs?

A) The present value of the maintenance costs is $27,802 less than the present value of the averted loss
B) The present value of the maintenance costs is $27,802 greater than the present value of the averted loss
C) The present value of the maintenance costs is $32,802 less than the present value of the averted loss
D) The present value of the maintenance costs is $32,802 greater than the present value of the averted loss

Question 31

Decisions to improve a property are less frequent than the decisions to maintain and repair it. A conversion of a property that produces a creative use of the structure that is different from its original purpose is more commonly referred to as a(n):

A) Rehabilitation
B) Remodeling
C) Adaptive reuse
D) Abandonment

Question 32

Property managers may choose at times not to perform ordinary maintenance at the time a problem is detected in order to boost short-run NOI. This type of maintenance is more commonly referred to as:

A) Custodial maintenance
B) Corrective maintenance
C) Preventive maintenance
D) Deferred maintenance