Deck 13: Risk Analysis

Question 1

Real estate that is not leveraged does not have interest rate risk.

Answer 1

False

Question 2

In general, investors risk seekers and, therefore, must be compensated more for the higher risk of some investments.

Answer 2

False

Question 3

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.

Answer 3

True

Question 4

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.

Question 5

Percentage rent is common in office building leases.

Question 6

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

Question 7

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

Question 8

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 9

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

Question 10

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

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

Question 11

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

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

Question 12

Real estate has a lot of inflation risk.

Question 13

Financial risk increases as the amount of debt increases.

Question 14

Using the same information as the question above, what would the land value be under the real options approach?

A) $120,000
B) $200,000
C) $300,000
D) $833,333
E) $1,000,000

Question 15

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

Question 16

Consider an investment in which a developer plans to begin construction of a building one year if, at that point, rent levels make construction feasible and the building will cost $1 million to construct. 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, similar to the "highest and best use" approach, what would be the land value of the property 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
E) $1,000,000

Question 17

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 3
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 18

Use of leverage always increases the amount of risk.

Question 19

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

Question 20

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 21

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 22

The renewal probability is assumed to be 60% for a particular lease with 12 months vacant if the lease is not renewed. The expected vacancy at the end of the lease is:

A) 4.8 months
B) 7.2 months
C) 9.0 months
D) 12.0 months

Question 23

Renewal probabilities related to a lease renewal can affect which of the following?

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 24

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 25

Which of the following is an example of real options?

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 26

Which of the following best describes 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 27

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 produces a BTIRRp of 12%. 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) 0.01249
B) 0.0090
C) 0.000156
D) 0.0949

Question 28

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