Deck 11: Investment Analysis and Taxation of Income Properties

Question 1

Which of the following is FALSE,concerning 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

Answer 1

It is not of concern to lenders when loan to value ratios are low

Question 2

A property is sold for $5,100,000 with selling costs of 3% of the sales price.The mortgage balance at the time of sale is $3,600,000.The property was purchased 5 years ago for $4,820,000.Annual depreciation allowances of $153,016 have been taken.If the tax rate is 28%,what is the after-tax cash flow from sale of the property?

A) $1,184,062
B) $969,840
C) $1,347,000
D) $1,097,218

Answer 2

$1,097,218

Question 3

A property produces a first year NOI of $100,000 which is expected to grow by 2% per year.If the property is expected to be sold in year 10,what is the expected sale price based on a terminal capitalization rate of 9.5% applied to the eleventh year NOI?

A) $1,308,815
B) $1,283,152
C) $1,263,158
D) $1,257,992

Answer 3

$1,283,152

Question 4

Which of the following definitions of income includes income from real estate classified as a capital assets?

A) Passive income
B) Active income
C) Portfolio income
D) Passive activity income

Question 5

A gross lease is riskier for the lessor than a net lease.

Question 6

An investor who has $75,000 in taxable income purchases a building that produces another $15,000 in taxable income.According to the table below,what is the marginal tax rate?

A) 29.50%
B) 29.57%
C) 28.00%
D) 31.00%

Question 7

The debt coverage ratio is used by lenders to indicate the riskiness of a loan.

Question 8

A small office building is purchased of $1,200,000 with a balloon mortgage that is due at the end of year 10.Payments are based on a 25 year amortization period.If one point was charged,what annual amount can be deducted for tax purposes?

A) $1,200
B) $480
C) $0
D) $800

Question 9

A property that produces a first year NOI of $80,000 is purchased for $750,000.The NOI is expected to increase by 15% in the sixth year when some of the leases turnover.The resale price in year 10 is expected to be $830,000.What is the net present value of the property based on the 10-year holding period and a discount rate of 9.5%?

A) $87,433
B) $87,221
C) $95,294
D) $116,490

Question 10

Which of the following is FALSE regarding expense stops?

A) Expense Stops protect owners against increases in expenses
B) Expense stops are usually based on expenses during the first term of the lease
C) Expense Stops can pass through expense savings to tenants
D) Expense Stops provide some protection against inflation

Question 11

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%

Question 12

Net Sale Proceeds less Adjusted Basis of the property determines which of the following:

A) After-Tax Net Present Value of the property
B) Depreciation allowance for the property
C) Before-Tax Net Present Value of the property
D) Capital gains or losses

Question 13

The use of a CPI index in lease contracts shifts risk to the tenant.

Question 14

The minimum lenders typically require for a DCR is:

A) 0.8
B) 1.0
C) 1.2
D) 1.5

Question 15

A property that produces an annual NOI of $100,000 was purchased for $1,200,000.Debt service for the year was $95,000 of which $93,400 was interest and the remainder was principal.Annual depreciation is $38,095.What is the taxable income?

A) $5,000
B) $6,600
C) -$31,495
D) -$33,095

Question 16

Expense stops protect the lessee from unexpected changes in market rents.

Question 17

A property produces an after tax internal rate of return of 12.24%.If the investor has a marginal tax rate of 31%,what is the before-tax equivalent yield?

A) 8.45%
B) 11.39%
C) 16.03%
D) 17.74%

Question 18

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

Question 19

The adjusted basis can defined as:

A) original cost + capital improvements - accumulated depreciation.
B) sales price - mortgage balance - sales costs.
C) sales price - accumulated depreciation.
D) original cost - mortgage balance - sales costs.

Question 20

A property is purchase for $15 million.Financing is obtained at a 75% loan-to-value ration with total annual payments of $1,179,000.The property produces an NOI of $1,400,000.What is the equity dividend rate (ratio of first year cash flow to equity)?

A) 5.89%
B) 9.33%
C) 7.86%
D) 8.64%

Question 21

When the sale of a passive activity produces a capital loss and unused passive losses from previous years remain,the unused losses can be used to offset any other source of income.

Question 22

Residential property is depreciated over 27.5 years where as non-residential property is depreciated over 31.5 years.

Question 23

Property held as a personal residence cannot be depreciated.

Question 24

When calculating the adjusted IRR the cash flows are always discounted to a present value at a safe rate.

Question 25

If an individual actively participates in the management of a rental property,he may deduct the full amount of the passive activity losses from active income,regardless of his adjusted gross income.

Question 26

The deductibility of depreciation to calculate taxable income will usually cause the effective tax rate to be lower than the actual tax rate.