Question 1

In determining a property's before-tax cash flow from operations (BTCF)and net operating income (NOI),it is important to understand how each accounts for the use of financial leverage in its calculation.Which of the following statements is true in regards to how these two measures account for the use of financial leverage?

Accepted Answer

BTCF (Before-Tax Cash Flow) is a levered cash flow because it takes into account the property's debt service, whereas NOI (Net Operating Income) is an unlevered cash flow as it does not consider debt service, focusing solely on the property's operational income and expenses.

Question 2

In calculating the net operating income (NOI)of a property,the "above-line" treatment of capital expenditures implies:

Accepted Answer

B

Question 3

Given the following information,calculate the equity dividend rate for this investment.First-year NOI: $18,750,Before-tax cash flow: $11,440,Acquisition price: $520,000,Equity Investment: 20%.

Accepted Answer

The equity dividend rate is calculated by dividing the before-tax cash flow by the equity investment. Here, the equity investment is 20% of the acquisition price, which is 20% of $520,000 = $104,000. The before-tax cash flow is $11,440. Therefore, the equity dividend rate is $11,440 / $104,000 = 0.11, or 11%.

Question 4

Given the following information,calculate the total amount of annual operating expenses for this income-producing property.Lawn care: $10,000,Property taxes: $24,000,Maintenance: $35,000,Janitorial: $25,000,Security: $32,000,Debt service: $145,000.

Accepted Answer

The total annual operating expenses include Lawn care, Property taxes, Maintenance, Janitorial, and Security, but exclude Debt service. Adding these expenses gives: $10,000 + $24,000 + $35,000 + $25,000 + $32,000 = $126,000.

Question 5

The key to meaningful valuations in real estate is to use defensible cash flow estimates.All of the following statements are true in regards to generating accurate cash flow estimates EXCEPT:

Accepted Answer

Considering only recent events rather than long-term trends would not provide an accurate picture of the property's cash flow potential. It is important to consider both short-term and long-term trends when evaluating revenue and expense items.

Question 6

Profitability ratios,income multipliers,and financial risk ratios can be used to provide a quick assessment of a property's relative value.Which of the following ratios measures the overall income-producing ability of the property?

Accepted Answer

The capitalization rate, also known as the cap rate, measures the overall income-producing ability of the property by comparing the net operating income (NOI) to the property value. A higher cap rate indicates a higher potential return on investment. Therefore, it is commonly used as a measure of the property's value.

Question 7

Given the following information,calculate the debt coverage ratio for this investment.Potential gross income: $120,000,Vacancy rate: 9%,Net operating income: $57,900,Operating expenses: $51,300,Acquisition Price: $520,000,Debt service: $40,000.

Accepted Answer

Debt coverage ratio is calculated by dividing Net Operating Income (NOI) by Debt Service.

NOI = Potential Gross Income * (1- Vacancy Rate) - Operating Expenses 
NOI = $120,000 * 0.91 - $51,300 
NOI = $68,700

Debt Coverage Ratio = NOI / Debt Service
Debt Coverage Ratio = $68,700 / $40,000 
Debt Coverage Ratio = 1.72

Therefore, the answer is B: 1.45.

Question 8

Given the following information,calculate the operating expense ratio for this property.Potential gross income: $120,000,Vacancy rate: 9%,Net operating income: $57,900,Operating expenses: $51,300.

Accepted Answer

Operating expense ratio = Operating expenses / Potential gross income

= $51,300 / ($120,000 x 91%)

= $51,300 / $109,200

= 0.469

= 47%

Therefore, the operating expense ratio for this property is 47%.

Question 9

The loan-to-value ratio measures the percentage of the acquisition price (or current market value)encumbered by debt.To protect their invested capital in the event that property values do fall,commercial mortgage lenders generally require that the senior mortgage not exceed approximately what percentage of the acquisition costs?

Accepted Answer

Commercial mortgage lenders generally require that the senior mortgage not exceed approximately 80% of the acquisition costs to protect their invested capital in the event that property values do fall.

Question 10

Given the following information,calculate the going-in capitalization rate for the specific property.First-year NOI: $18,750,Acquisition price: $150,000,Equity Investment: 20%.

Accepted Answer

The going-in capitalization rate is calculated by dividing the first-year NOI by the acquisition price. So, $18,750 / $150,000 = 0.125 or 12.5%.

Question 11

The measure of cash flow most relevant to investors in income-producing real estate is the after-tax cash flow (ATCF)from property operations.Therefore,it is important to know that the maximum federal income tax rate on individuals is currently:

Accepted Answer

The maximum federal income tax rate on individuals is currently 35%, which will impact the after-tax cash flow from property operations. As investors in income-producing real estate, it is important to consider the after-tax cash flow when making investment decisions, as this reflects the actual cash flow that will be available to the investor after taxes are paid.

Question 12

Given the following information,calculate the loan-to-value ratio for this property.Loan amount: $450,000,Interest rate: 7.5%,Acquisition price: $550,000

Accepted Answer

Loan-to-value ratio = (Loan amount / Acquisition price) x 100%
= ($450,000 / $550,000) x 100%
= 0.8182 or 82% (rounded to two decimal places)
Therefore, the correct choice is B.

Question 13

The going-in capitalization rate can vary significantly by property quality.Which of the following classes of properties within a particular property type would be expected to have the highest cap rates?

Accepted Answer

Class C properties are generally older, have lower-quality construction, and are located in less desirable areas, resulting in higher cap rates to compensate investors for increased risk. Class A properties, on the other hand, are newer, have higher-quality construction, and are typically located in prime locations, resulting in lower cap rates. Class B properties fall somewhere in between, with moderate levels of risk and potential return. Therefore, Class C properties would be expected to have the highest cap rates.

Question 14

Given the following information,calculate the cash down payment required to purchase the specific property.Purchase Price: $500,000,Loan Amount: 80% of purchase price,Up-front financing costs: 2.5% of loan amount.

Accepted Answer

The answer of Given the following information,calculate the cash down...

Question 15

Given the following information,calculate the effective gross income multiplier for the specific investment.Effective gross income: $49,500,First-year NOI: $18,750,Acquisition price: $520,000,Equity Investment: 20%.

Accepted Answer

The Effective Gross Income Multiplier (EGIM) is calculated by dividing the acquisition price by the effective gross income. So, EGIM = $520,000 / $49,500 = 10.5.

Question 16

In making single-asset real estate investment decisions,the first pass often involves calculating a series of returns,ratios,and multipliers.Which of the following is often cited as a limitation associated with this type of analysis?

Accepted Answer

Single-asset real estate investment decisions often involve calculating returns, ratios, and multipliers, but a limitation of this type of analysis is that it fails to incorporate cash flows beyond the first year of the analysis. This limitation can lead to inaccurate assessments of long-term investment viability.

Question 17

Helpful in assessing the risk of lending to investors for particular projects,which of the following calculations measures the income-producing ability of the property to meet operating and financial obligations?

Accepted Answer

The answer of Helpful in assessing the risk of lending...

Question 18

In an analogy to the stock market,the net operating income of a property can be viewed as which of the following?

Accepted Answer

The net operating income of a property is similar to the annual dividend expected to be produced by a stock. Just as the dividend is the return received from owning shares of a stock, the net operating income is the return received from owning a property.

Question 19

Prior to determining the treatment of capital expenditures in the calculation of NOI,it is important to distinguish these costs from operating expenses.In contrast to operating expenses,capital expenditures:

Accepted Answer

Capital expenditures are investments in the property that increase its market value, unlike operating expenses which are for the day-to-day running of the property and are fully deductible in the year they are incurred. Capital expenditures typically include major improvements or additions that extend the useful life of the property, rather than minor repairs or maintenance expenses.

Question 20

Given the following information,calculate the net income multiplier for this property.First-year NOI: $18,750,Acquisition price: $150,000,Equity Investment: 20%.

Accepted Answer

The net income multiplier is calculated by dividing the acquisition price by the first-year NOI. So, $150,000 / $18,750 = 8.0. The equity investment percentage is not needed for this calculation.

Quiz 18: Investment Decisions: Ratios

In calculating the net operating income (NOI) of a property,the "above-line" treatment of capital expenditures implies: