Deck 15: Financing Corporate Real Estate Part Four Financing Proposed Projects

Question 1

Why might it be argued that corporations do not have a comparative advantage when investing in real estate as a means of diversification from the core business?

A)Corporations cannot react as quickly as individual investors to changes in market conditions
B)Corporations do not typically hold real estate in a large number of geographic areas and may not hold a variety of different types of properties
C)Corporations often use property managers who do not understand financial markets
D)Diversification dilutes a corporations risk-return profile and does not provide an advantage to corporations

Answer 1

Corporations do not typically hold real estate in a large number of geographic areas and may not hold a variety of different types of properties

Question 2

A company estimates that the incremental cost of owning a parcel of real estate vs.leasing will be 10%.The company expects a 12% rate of return on investments.Therefore real estate should be owned and not leased

Answer 2

False

Question 3

Because accounting depreciation charges often exceed the true economic depreciation of real estate,the earnings of companies owning real estate typically understate the level of operating cash flow

Answer 3

True

Question 4

Because real estate is shown on the corporation's books at its historical cost less book depreciation,the value of corporate real estate is often considered "hidden" from shareholders

Question 5

Similar to decisions about owning or leasing equipment,the decision to own or lease a property is basically just a choice between two financing alternatives

Question 6

In general,if a company assumes that the residual value at the end of the holding period is always equal to the book value,the decision to own versus lease will be biased towards owning

Question 7

Which of the following tax law changes has reduced the incentive for individuals to lease to corporations as a part of the Tax Reform Act of 1986?

A)Depreciation lives were lengthened
B)The highest marginal tax rate for corporations is much lower than the highest marginal tax rate for individuals
C)Individuals are subject to limitations on "passive" losses used to offset other taxable income
D)Income from corporations are no longer double taxed

Question 8

Which of the following factors does NOT represent an effect of corporate real estate ownership on corporate financial statements?

A)The unrealized source of potential gain from the sale of property is not represented on annual income statements
B)Income represented on accounting statements may underestimate the actual cash flows provided by property
C)The book value of property on the balance sheet may not represent the actual market value
D)The corporation's overall debt ratio may be reduced,and property is carried at book value but financed at market value

Question 9

A company sells an office building that has appreciated in value and subsequently leases the space.Which of the following scenarios represents an impact that sale-leasebacks may have on corporate financial statements?

A)Lower total income will be realized in the year of sale because of capital gains tax
B)Higher taxable income will be realized in the year of sale because of a gain on sale
C)Earnings per share increases because the mortgage has been paid off
D)Higher taxable income will be realized because lease payments cannot be deducted

Question 10

For a large corporation with a good credit rating seeking to finance corporate real estate,the cost of a mortgage loan may be greater than the cost of unsecured corporate debt

Question 11

A company is planning to move to a larger office and is trying to decide if the new office should be owned or leased.Cash flows for owning versus leasing are estimated as follows.Assume that the cash flows from operations will remain level over a 10 year holding period.If purchased,the company will invest $385,000 in equity and finance the remainder with an interest-only loan that has a balloon payment due in year 10.The after-tax cash flow from sale of the property at the end of year 10 is expected to be $750,000.What is the incremental rate of return on equity to the company,if the property is owned instead of leased?

A)17.99%
B)13.26%
C)10.32%
D)12.62%

Question 12

Which of the following conditions will NOT cause a lease to be categorized as a capital lease?

A)It extends for at least 90 percent of the asset's life
B)It transfers ownership to the lessee at the end of the lease term
C)It seems likely that ownership will be transferred to the lessee at the end of the lease term because of a "bargain purchase" option
D)The present value of the contractual lease payments equals or exceeds 90 percent of the fair market value of the asset at the time the lease is signed

Question 13

If the incremental cash flows from owning versus leasing are compared without explicitly considering debt financing,these returns should be compared to the firm's cost of equity

Question 14

Non-recourse debt,such as a mortgage on a specific property,typically has a lower rate than the unsecured debt of companies with high credit ratings

Question 15

A company can diversify its business activities by developing,owning and subsequently leasing real estate to other companies.Because of the diversification benefits,shareholder value is always increased

Question 16

Because real estate usually declines in value faster than accounting depreciation,it is reasonable to assume that the property has zero value at the end of the lease term

Question 17

The residual value at the end of the holding period should be based on the market value of the real estate and not the book value

Question 18

For which of the following reasons would a business prefer to own real estate rather than lease it?

A)If the business demands specialized or unique facilities
B)Owning allows the business to develop skills in operating,maintaining,and repair real estate and the associated facilities
C)Owning reduces operating flexibility
D)The capital commitments with owning are lower than the capital commitments associated with leasing
E)All of the above are reasons a business would prefer to own space rather than lease it

Question 19

If a company's space requirements are far less than what is optimal to develop on a given site,leasing would tend to be more favorable

Question 20

An operating lease does not affect a corporate balance sheet

Question 21

All other factors being equal,a company would prefer to own rather than lease under which of the following conditions?

A)The expected life of an asset far exceeds the company's projected period of use
B)The real estate investment represents a large proportion of the company's total capital
C)The corporate needs for the property are not highly sensitive to the level of maintenance
D)The corporation needs a specialized research and development building

Question 22

It is estimated that corporate users control as much as ___ percent of all commercial real estate.

A)10
B)25
C)75
D)100

Question 23

Which of the following statements is FALSE regarding operating leases?

A)They are recorded as present value of lease on the balance sheet
B)They do not have any real effect the balance sheet
C)They must not extend for at least 75 percent of the asset's life
D)They are usually the preferred form of accounting for leases

Question 24

The cash flows considered in a sale-leaseback analysis are:

A)Purchase price,differences in operating expenses over the holding period,and cash flow from future sale
B)Purchase price,lease payments,and cash flow from future sale
C)Cash flow from sale,differences in future cash flow from operations,and potential cash flow from future sale
D)Cash flow from sale,future lease payments,and differences in future operating expenses

Question 25

Which of the following statements is TRUE for a corporation with a high credit rating considering owning versus leasing corporate real estate?

A)The company should probably use a mortgage
B)The company can probably issue corporate debt at a more favorable rate
C)The company is probably better off leasing the property from someone with a lower credit rating
D)The company's credit rating does not effect the own versus lease decision

Question 26

The cash flows considered in a lease versus own analysis are:

A)Purchase price,difference in cash flow from operations over the holding period,and cash flow from sale
B)Purchase price,lease payments,and cash flow from future sale
C)Cash flow from sale,differences in future operating expenses,and cash flow from future sale
D)Cash flow from sale,future lease payments,and differences in future operating expenses

Question 27

Which of the following could be affected if a corporation acquires a parcel of real estate?

A)Earnings per share ratio
B)Corporate liquidity
C)Corporate risk
D)All of the above

Question 28

Which of the following does NOT represent a potential benefit of selling and leasing back a property?

A)Provides a source of capital
B)Returns excess capital to investors
C)Demonstrates the value of the real estate to the marketplace
D)Increases the firm's depreciation deductions

Question 29

When doing a sale versus lease analysis,how should the residual value of the property be estimated?

A)Assume it is worthless
B)Set it equal to the book value of the property
C)Assume it is equal to the original purchase price
D)Assume it is equal to the market value of the real estate