Deck 12: Financial Leverage and Financing Alternatives

Question 1

A loan in which the lender receives a percentage of the net operating income from the property is known as a(n):

A) participation loan.
B) accrual loan.
C) convertible loan.
D) percentage loan.

Answer 1

participation loan.

Question 2

A property is financed with a 75% loan at 11.5% over 25 years.The property produces an ATIRR on total investment of 7.34% based on a tax rate of 31%.What can be said about the leverage associated with the property?

A) Negative leverage exists
B) Positive leverage exits
C) No leverage exists
D) Can't tell without knowing the ATIRR on equity

Answer 2

Negative leverage exists

Question 3

A loan in which the lender has an option to purchase an equity interest in a property is known as a(n):

A) participation loan.
B) accrual loan.
C) convertible loan.
D) percentage loan.

Answer 3

convertible loan.

Question 4

In an inflationary environment where property values are also rising,a participation loan may provide a lender with some protection against unanticipated inflation.

Question 5

A property produces an 8.92% ATIRR on the total investment considering a tax rate of 28%.What is the maximum interest rate that could be paid on debt without causing the leverage to be negative?

A) 12.39%
B) 11.42%
C) 6.42%
D) 9.37%

Question 6

A lender requires a 1.20 debt coverage ratio as a minimum.If the net operating income of a property is $45,000,what annual amount of debt service would provide the required debt coverage ratio?

A) $37,500 or higher
B) $37,500 or lower
C) $54,000 or higher
D) $54,000 or lower

Question 7

Which of the following would typically NOT be used as a basis for a participation loan?

A) Increase in value over the holding period
B) NOI in excess of a base amount
C) Cash Flow after regular Debt Service
D) Potential gross income

Question 8

When constructing a convertible mortgage,the lender will require a contract interest rate equal to or greater than the market rate on a similar mortgage without conversion option.

Question 9

Which of the following types of loan is also called a negative amortization loan?

A) Participation loan
B) Accrual loan
C) Convertible loan
D) Interest-only loan.

Question 10

When the internal rate of return on an investment increases as the loan-to-value ratio increases,positive leverage exists.

Question 11

Which of the following gives the lender an option to purchase a full or partial interest in the property at the end of some specified period of time:

A) Convertible Loan
B) Sale Lease Back
C) Accrual Loan
D) Interest-Only Loan

Question 12

A property is financed with an 85% loan-to-value ratio at 10% interest over 25 years.Estimate the BTIRRE on equity given that the BTIRRP is 10.75%.

A) 10.1%
B) 10.4%
C) 15.0%
D) 13.2%

Question 13

Which of the following is FALSE concerning Interest-Only Loans:

A) They usually have a balloon payments
B) They have greater amortization than conventional loans
C) They may result in more cash flow to the investor
D) They may allow for a lower DCR

Question 14

Everything else equal,the loan balance on a negative amortization loan will be less than that on an interest-only loan after the first year.

Question 15

If a property has positive leverage,the owner should borrow as much as possible.

Question 16

Which of the following is FALSE concerning Negative Amortization:

A) It can result in a decreases in the borrower's equity in the property
B) It usually increases default risk
C) It usually has a lower interest rate than a conventional loan
D) It usually results in a lower DCR.

Question 17

If properly constructed and assuming everything but the structure of the interest payment is equal,which of the following loans would typically have the highest first-year debt service?

A) Accrual loan
B) Conventional loan
C) Interest-only loan
D) Participation loan

Question 18

Which of the following would NOT be considered an advantage that an investor might consider under a sale-leaseback of land?

A) The sale-leaseback in effect provides 100% financing on the land
B) Lease payment are tax deductible
C) The sale-leaseback provides the same depreciation deductibility with a smaller equity investment
D) The land may appreciate over the holding period

Question 19

An interest-only loan will provide a higher debt coverage ratio than an amortizing loan with the same interest rate.

Question 20

Which of the following is NOT a benefits of a Sale Leaseback of land for investors?

A) It is a way of effectively obtaining 100% financing
B) The lease payments are tax deductable
C) Land can not be depreciated for tax purposes
D) The land value may increase over the holding period.

Question 21

Properties with a higher ratio of debt are considered to also have a higher risk assuming everything else is equal.

Question 22

If a property owner borrows money at a rate that is higher than the equity yield rate,negative leverage exists.

Question 23

A loan in which the lender receives part of the proceeds from the sale of the property is known as a convertible loan.

Question 24

The loan alternative with the highest ATIRR will always be preferable to the borrower.