Question 1

There are a set of restrictive conditions that REITs must satisfy on an ongoing basis in order to maintain their special tax status. All of the following statements regarding the main restrictions are true EXCEPT:

Accepted Answer

A REIT must distribute at least 90% of its taxable income to shareholders in the form of dividends, not 75%.

Question 2

Up until the market for these instruments collapsed in 2008, which of the following was the fastest-growing source of long-term commercial mortgage funds from 2002-2007?

Accepted Answer

Commercial mortgage backed securities (CMBS) were the fastest-growing source of long-term commercial mortgage funds from 2002-2007, until the market for these instruments collapsed in 2008. Real estate investment trusts (REITs) and construction loans were also significant sources of commercial mortgage funds during this period, but they did not experience the same growth trajectory as CMBS. Residential mortgage backed securities (MBS) are a different type of financial instrument that are backed by residential mortgage loans, not commercial mortgage loans.

Question 3

Of the $3.97 trillion in outstanding mortgage debt in the U.S., approximately $2.96 trillion is privately held by institutional and individual investors. Which of the following investor groups is the largest single source of private mortgage funds?

Accepted Answer

Commercial banks are the largest single source of private mortgage funds, holding a significant portion of the mortgage debt in the U.S. compared to other private entities.

Question 4

When fund managers collect contributions from multiple sources and "commingle" them to purchase properties, this is referred to as the use of commingled real estate funds. Which of the following institutional investors utilize commingled real estate funds for approximately one-half of their investments in real estate?

Accepted Answer

Pension funds are known to utilize commingled real estate funds for approximately one-half of their investments in real estate. Investment banks, life insurance companies, and real estate advisory firms may also use commingled funds, but not to the same extent as pension funds.

Question 5

In recent years, a number of pooled ownership structures have emerged that have changed the analysis of ownership form selection for many investors. Which of the following ownership structures is generally used for small, local investments that are marketed to accredited, but non-institutional investors?

Accepted Answer

Limited liability companies (LLCs) are often used for small, local investments and are marketed to accredited, non-institutional investors due to their flexible structure and tax advantages.

Question 6

There are two major types of REITs: Equity REITs and Mortgage REITs. Each differs in terms of what they invest in. Which of the following choices best describes the investment focus of an Equity REIT?

Accepted Answer

Equity REITs primarily invest in and operate commercial properties, such as office buildings, shopping centers, and apartment buildings. They generate income through the rental and leasing of these properties. Therefore, option B is the correct answer. Option A is incorrect because Equity REITs do not typically invest a significant percentage of their assets in mortgages. Option C refers to Mortgage REITs, not Equity REITs. Option D is also incorrect because Equity REITs do not purchase ownership interests in shares of pension funds or life insurance companies.

Question 7

Though difficult to accurately measure, the market value of U.S. real estate held by non-real estate corporations is estimated to exceed $12.5 trillion. All of the following are examples of noninvestible commercial real estate EXCEPT:

Accepted Answer

Noninvestible commercial real estate refers to properties that are not available for investment by the general public, typically because they are owned and used by the companies themselves for their operations. Choices A, B, and C are examples of properties owned and used by businesses for their own purposes, making them noninvestible. Choice D, an assembly plant building owned by a group of investors as part of an LLC, represents a form of investment property, as it is owned by investors rather than by a company for its own operational use, making it investible commercial real estate.

Question 8

In recent years, which of the following pooled ownership structures are used by private funds that are trying to attract capital from very high net worth and institutional investors?

Accepted Answer

Limited partnerships are commonly used by private funds to attract capital from high net worth and institutional investors due to their favorable tax treatment and limited liability for investors.

Question 9

The choice of ownership form for pooled equity investments depends heavily on federal tax considerations. Which of the following ownership structures suffers from the major disadvantage of double taxation?

Accepted Answer

A C Corporation suffers from the major disadvantage of double taxation, where the corporation's profits are taxed at the corporate level and again when distributed to shareholders as dividends. Subchapter S Corporations, General Partnerships, and Limited Liability Companies do not have this disadvantage as their profits are passed through to the owners and taxed only at the individual level.

Question 10

In most small to medium private real estate deals, syndicators play important roles within the origination, operation, and completion phases of a real estate syndicate's life. All of the following are responsibilities of the syndicator in the operation phase of a syndicate's life EXCEPT:

Accepted Answer

While syndicators do play important roles in managing the properties and raising additional investment capital, preparing the properties for sale is typically done in the completion phase of the syndicate's life. Therefore, the responsibility of preparing the properties for sale falls under the completion phase rather than the operation phase.

Question 11

In most pooled ownership forms a single partner is empowered to act on behalf of the investors in terms of making property investment decisions. Based on your understanding of the different types of pooled ownership, which of the following structures would we expect this issue to be the least prevalent?

Accepted Answer

The answer of In most pooled ownership forms a single...

Question 12

All of the following are responsibilities of the syndicator in the origination phase of a syndicate's life EXCEPT:

Accepted Answer

Raising additional investment capital is not a responsibility of the syndicator in the origination phase of a syndicate's life; it is part of the syndication phase. The responsibilities of the syndicator in the origination phase include developing the concept for the syndication, organizing the legal entity, and acquiring or obtaining control of the real estate.

Question 13

Ownership forms for pooled equity investment can differ in terms of how the entity's cash flows are distributed to its investors. Which of the following ownership structures requires cash flows to be allocated to each shareholder in proportion to his or her ownership of the entity, thereby preventing special allocations to multiple classes of investors?

Accepted Answer

Subchapter S Corporations require that cash flows be allocated to each shareholder in proportion to their ownership of the entity. This structure does not allow for special allocations to multiple classes of investors, unlike partnerships and LLCs which can have more flexible distribution arrangements.

Question 14

Section 1031 of the Internal Revenue Code permits investors to defer some or all of the taxable gain that would ordinarily be due on the sale of a property if they exchange for "like-kind" property. In order to avoid income taxes, many investors attempted to make use of this tax code when disposing of commercial real estate assets. This led to the reemergence of which of the following forms of ownership in commercial real estate?

Accepted Answer

Section 1031 exchanges have led to a resurgence in the use of tenancy-in-common ownership in commercial real estate. With this form of ownership, multiple investors hold fractional interests in the property, enabling them to exchange their shares for "like-kind" property without triggering taxable gains. This allows investors to achieve greater diversification and flexibility in their real estate holdings, and may also provide additional tax benefits through depreciation deductions and the ability to offset gains and losses across multiple properties. The other options, while still used in commercial real estate, are not specifically associated with the use of Section 1031 exchanges.

Question 15

In contrast to public markets, private markets are characterized by individually negotiated transactions that take place without the aid of a centralized market. Therefore, private markets will generally have:

Accepted Answer

Private markets are characterized by individually negotiated transactions, which can have high transaction costs due to the lack of a centralized market. Since transactions are negotiated individually, there may be fewer buyers and sellers, making it harder to buy or sell assets quickly, resulting in low liquidity. Therefore, private markets generally have high transaction costs and low liquidity.

Question 16

The syndication agreement generally creates a principal/agent relationship in which the syndicator (agent) is empowered to act on behalf of the investors (principals). In most principal/agent relationships, there is the concern that the agent will act in the agent's best interest, not in the best interests of the principal. This issue is more commonly referred to as:

Accepted Answer

Moral hazard refers to the risk that the agent (syndicator) may take actions that benefit them but are not in the best interest of the principal (investors). This risk arises due to the asymmetry of information between the principal and agent. Adverse selection, dual agency, and signaling are different concepts related to agency relationships.

Question 17

The choice of ownership form for pooled equity investments can also depend on the desire to avoid personal liability. Which of the following ownership structures suffers from the major disadvantage of unlimited liability for all investors?

Accepted Answer

The ownership structure that suffers from the major disadvantage of unlimited liability for all investors is the general partnership. In a general partnership, all partners are personally liable for the partnership's debts and obligations. C corporations, subchapter S corporations, and limited partnerships all offer limited liability to their investors to varying degrees.

Question 18

There are a number of ways in which individual and institutional investors can hold investments in commercial real estate as a part of their portfolio. One way is to purchase and hold the title to the actual commercial property, which gives the owner complete control of the asset. This type of transaction would be considered which of the following?

Accepted Answer

Purchasing and holding the title to the actual commercial property is a direct investment in private commercial real estate equity, as the investor owns a portion of the property and is directly responsible for its performance and maintenance.

Question 19

At the end of 2015, commercial banks and other financial institutions collectively owned $15 billion in commercial real estate equity. The vast majority of these holding are the result of which of the following types of investment by these institutions?

Accepted Answer

The vast majority of commercial real estate equity held by banks and financial institutions is typically acquired through borrower default and foreclosure. This is because when borrowers fail to meet their loan obligations, the lending institutions often take ownership of the collateral real estate as a means to recover the outstanding loan amount.

Question 20

The $8.8 trillion total market value of commercial real estate can be broken into four quadrants. Which of the following sectors of the commercial real estate market currently accounts for the largest proportion of market value?

Accepted Answer

Privately held equity accounts for the largest proportion of market value in the commercial real estate market, with an estimated value of $4 trillion. The other options do not have as large a market value as privately held equity.

Quiz 17: Sources of Commercial Debt and Equity Capital