Deck 13: Risk Analysis

Question 1

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.

Answer 1

False

Question 2

Percentage rent is common in office building leases.

Answer 2

False

Question 3

In general,investors are assumed to be risk seekers who must be compensated more for the higher risk of some investments.

Answer 3

False

Question 4

Real estate is generally dramatically affected by inflation risk.

Question 5

The range of returns (highest to lowest)is the most common risk measure.

Question 6

Consider an investment in which a developer plans to begin construction,of a building that will cost $1,000,000,in one year if,at that point,rent levels make construction feasible.There is a 50 percent chance that NOI will be $160,000 and a 50 percent chance that NOI will be $80,000.Using the traditional approach,which is similar to the "highest and best use" approach,what will the land value of the property be at the completion of the construction,assuming a cap rate of 10 percent (12 percent discount rate and an NOI growth rate of 2 percent)?

A)$120,000
B)$200,000
C)$300,000
D)$833,333

Question 7

The term "financial risk" refers to the probability of interest rates changing.

Question 8

Consider an investment in which a developer plans to begin construction,of a building that will cost $1,000,000,in one year if,at that point,rent levels make construction feasible.There is a 50 percent chance that NOI will be $160,000 and a 50 percent chance that NOI will be $80,000.Assuming a cap rate of 10 percent (12 percent discount rate and an NOI growth rate of 2 percent)what would the land value be at the completion of the construction,under the real options approach?

A)$120,000
B)$200,000
C)$300,000
D)$833,333

Question 9

Consider two investments: Investment 1 has a 50% chance of producing a return of zero and a 50% chance of producing a return of 40%
Investment 2 has a 50% chance of producing a return of 10% and a 50% chance of producing a return of 30%
Which of the following statements regarding the investments is TRUE?

A)Investment 1 is riskier than Investment 2
B)Investment 2 is riskier than Investment 1
C)Investment 1 and Investment 2 have the same amount of risk
D)Investment 1 is a better investment because it has the potential to produce the highest returns

Question 10

In general,real estate is usually considered more risky than bonds but less risky than stocks.

Question 11

Partitioning the internal rate of return is useful because it helps the investor to determine how much of the return is from annual operating cash flow and how much is from the projected resale cash flow.

Question 12

Real estate that is not leveraged is not affected by interest rate risk.

Question 13

Use of leverage always increases the amount of business risk.

Question 14

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

Question 15

The term "due diligence" refers to conducting an investigation before buying a property.

Question 16

Financial risk increases as the amount of debt increases.

Question 17

Land can be viewed as having an "option" to develop the land.

Question 18

Which of the following is NOT a component of lease rollover risk?

A)Commissions paid to a leasing agent to find a new tenant
B)Costs of tenant improvements demanded by new tenants
C)Liquidity risk
D)Reduced revenues from vacancy until a new tenant is found

Question 19

Risk due to potential tax law changes is referred to as:

A)Business risk
B)Financial risk
C)Legislative risk
D)Tax risk

Question 20

Consider risk-return characteristics of Investments A-D,given above.Which of the following statements is TRUE?

A)Investment C is preferred to Investment D
B)Investment D is preferred over all other investments
C)Investment A is preferred to Investment B
D)Investment B is preferred to Investment C

Question 21

Which of the following may be used as a market leasing assumption (including a renewal probability)in an analysis related to a lease renewal?

A)Market rent paid after the existing lease ends
B)Vacancy after the existing lease ends.
C)Leasing commissions paid after the existing lease ends
D)All of the above

Question 22

Which of the following refers to the risk real estate investors face stemming from changes in general economic conditions?

A)Financial risk
B)Liquidity risk
C)Environmental risk
D)Business risk

Question 23

When sales exceed a breakpoint sales volume in a retail lease with percentage rent,the additional rent is referred to as:

A)Retail rent
B)Participation rent
C)Overage rent
D)Sales rent

Question 24

Which of the following is an example of a "real option" in an investment decision?

A)Valuation of vacant land
B)Valuation of projects with phases of development
C)Valuation of a building that can be renovated
D)All of the above

Question 25

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 would produce a BTIRRp of 12%; and an optimistic scenario would produce a BTIRRp of 16%.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)0.062%
B)1.248%
C)2.498%
D)2.904%

Question 26

Which of the following increases with use of leverage in a business?

A)Financial risk
B)Liquidity risk
C)Environmental risk
D)Inflation risk

Question 27

Which of the following would be most suitable for use in analyzing the best-case,worst-case,and most-likely outcomes for potential investment opportunity?

A)Risk analysis
B)Financial analysis
C)Sensitivity analysis
D)Cost analysis

Question 28

Which of the following BEST describes the process of "partitioning the IRR"?

A)Dividing the IRR into income and appreciation components
B)Using the IRR as a discount rate and determining how much of the present value comes from income and resale
C)Dividing the IRR into before-tax and after-tax IRRs
D)Determining how much of the IRR comes from each property in a portfolio

Question 29

Which of the following best describes the approach to valuing land as a "real option"?

A)The land value reflects the fact that the developer can wait to decide whether to construct a building on the site
B)The seller provides the investor with an option to purchase the land at a specific price before a certain date
C)The land is valued at its most probable use
D)The seller has an option to repurchase the land from the buyer before construction takes place

Question 30

A property owner may incur some downtime due to the expiration of a lease that has not been renewed.The time period that occurs before the owner can contract with a new tenant is referred to as:

A)Absentia turnover
B)Market turnover
C)Lease turnover
D)Vacancy turnover

Question 31

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