Deck 11: Investment Analysis and Taxation of Income Properties

Question 1

Property held as a personal residence cannot be depreciated.

Answer 1

True

Question 2

An effective tax rate:

A) Takes into account the effects of depreciation and time value of money
B) Measures the actual difference between the BTIRR and the ATIRR
C) Can be less than the actual marginal tax rate
D) All of the above

Answer 2

All of the above

Question 3

In making an investment decision, IRR analysis will lead to a different "go/no-go" decision than NPV analysis.

Answer 3

False

Question 4

CPI adjustments shift the risk of unexpected inflation is shifted to the lessor.

Question 5

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

Question 6

Expense stops shift the risk of increases in expenses to the lessee while allowing the lessor to retain the benefit of any decrease in expenses.

Question 7

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 8

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

Question 9

Which of the following statements regarding equity is TRUE?

A) The amount of equity an investor has in a property may change over time if the property value and loan balance changes
B) The amount of equity an investor has in a property depends on the value of the equity the investor has in his or her other investments
C) The outstanding balance on loan on the property does not affect the amount of equity an investor has in the property
D) All of the above

Question 10

A restaurant is for sale for $200,000. It is estimated that the restaurant will earn $20,000 a year for the next 15 years. At the end of 15 years, it is estimated that the restaurant will sell for $350,000. Which of the following would be MOST LIKELY to occur if the investor's required rate of return is 15 percent?

A) Investor would pursue the project
B) Investor would not pursue the project
C) Investor would pursue the project if the holding period were longer than 15 years
D) Not enough information provided

Question 11

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 12

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

Question 13

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

Question 14

Which of the following is NOT one of the primary benefits of investing in real estate income property?

A) Net Income-Dollars left over after collecting rent and paying expenses but before considering taxes and financing costs
B) Property Sale-Expecting a price increase over a specified holding period increases investor return
C) Diversification-Reducing overall risk to hold many types of investments
D) Taxes-Preferential tax benefits mean taxable income is often less than before-tax cash flow
E) Business cycles-Real estate income properties tend to generate higher incomes when other investments are in decline

Question 15

The equity dividend rate is an accurate measure of investment yield because it takes into account future cash flows.

Question 16

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

Question 17

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

Question 18

Debt coverage ratio measures the degree to which the NOI from the property is expected to exceed the mortgage payment.

Question 19

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

Question 20

The real estate industry:

A) Is highly competitive
B) Is a relatively small market
C) Is relatively concentrated, with a few owners controlling most of the market in most markets
D) All of the above
E) None of the above

Question 21

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 22

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 23

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 24

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 25

Which of the following is FALSE regarding an expense stop?

A) All operating expenses are covered by the stop
B) The passthrough is based on the tenant's 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 26

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

Question 27

The minimum lenders typically require for a DCR is:

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

Question 28

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

Question 29

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 30

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

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

Question 31

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 32

Which of the following is FALSE regarding 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

Question 33

The adjusted basis can be 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 34

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? Taxable Income Marginal Tax Rate
$0 - $34,000 15%
$34,001 - $82,150 28%
Over $82,150 31%

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

Question 35

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 36

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