Question 1

Real estate asset managers perform certain functions that would not be expected of asset managers who deal with stock and bond portfolios. Which of the following functions would you expect both asset managers in real estate as well as stocks / bonds to perform?

Accepted Answer

Both real estate asset managers and stock/bond asset managers are responsible for monitoring the performance of their assets to ensure they are meeting their investment objectives. While real estate asset managers perform functions such as finding specific assets, negotiating prices, and overseeing due diligence and closing, these functions may not be applicable or necessary for stock/bond asset managers.

Question 2

Leases are considered the engines that drive property values. Therefore, it should not be surprising that owners of commercial property may seek an independent leasing broker to focus on finding tenants to lease space. In exchange for their services, leasing brokers are paid a commission based on what percentage of the face amount of the lease?

Accepted Answer

Leasing brokers are typically paid a commission based on a percentage of the face amount of the lease. This percentage typically falls within the range of 3 to 5%. This compensation structure provides brokers with a financial incentive to negotiate the best possible lease terms and find high-quality tenants, which in turn can drive up property values for owners. Therefore, choice B, 3 to 5%, is the correct answer. The other choices are too low or too high to be typical commission rates for leasing brokers.

Question 3

For residential properties, the ratio of prospective rent to gross monthly income is a valuable screening tool in judging a potential tenant's ability to fulfill rent obligations. Generally, this ratio should not exceed:

Accepted Answer

The generally accepted standard is that a tenant's rent should not exceed 30% of their gross monthly income. This means that the ratio of prospective rent to gross monthly income should not exceed 30%. Anything above this could suggest that the tenant may have trouble fulfilling their rent obligations on time.

Question 4

Commercial real estate returns are determined in no small part by how well the ongoing management function is performed. Management decisions can be classified into two categories: property management and asset management. Which of the following functions would be considered a primary responsibility of an asset manager?

Accepted Answer

Property acquisitions and dispositions are a primary responsibility of an asset manager. Asset management focuses on the strategic planning and financial management of a real estate portfolio to maximize returns and achieve investment objectives. This includes making decisions on buying or selling properties, analyzing market trends, and determining the optimal use of capital. Property management, on the other hand, focuses on day-to-day operations such as maintenance, leasing, and tenant relations. Marketing a property to prospective tenants, maintaining the condition of the property, and signing leases are all functions of property management.

Question 5

When property managers are looking to secure a mix of tenants for which "the whole is greater than the sum of its parts," or in other words a group of tenants that shares similar characteristics such that the experience of living together is mutually beneficial, they are seeking what is referred to as:

Accepted Answer

Synergism refers to the phenomenon where the combined efforts of a group of tenants result in a greater overall benefit than the sum of the individual benefits. When property managers seek to secure a mix of tenants that share similar characteristics, they are looking for synergism among the tenants. Permanence potential refers to the likelihood that tenants will remain in a property for an extended period, rehabilitation involves the restoration or renovation of a property, and adaptive reuse refers to the process of repurposing a property for a new use. None of these options accurately describe the situation described in the question.

Question 6

In contrast to maintenance and repair expenditures, which are operating expenses, the improvement decision generally involves a capital expenditure meant to increase the value of the structure. Which of the following classifications of improvements calls for the restoration of a property to satisfactory condition without changing the floor plan, form, or style of the structure??

Accepted Answer

Rehabilitation refers to restoring a property to a satisfactory condition without changing the floor plan, form, or style of the structure. It involves repairing or replacing outdated or worn-out elements of the building, such as the roof, mechanical systems, or electrical systems, in order to restore it to its original condition. Remodeling, on the other hand, involves changing the form or layout of a structure, while adaptive reuse and conversion involve changing the use of a property.

Question 7

Despite the magnitude of their real estate holdings, many non-real estate corporations have historically expended little effort to manage these assets effectively. Recently, the development of which of the following markets has helped to quell concerns related to this issue?

Accepted Answer

Sale-leaseback markets have provided a mechanism for non-real estate corporations to manage their real estate assets more effectively by selling the property to another entity and then leasing it back. This allows the corporation to free up capital tied in real estate for other uses while still retaining the use of the property.

Question 8

Both owners and managers must carefully designate their responsibilities in the management agreement. In a management agreement, all of the following would typically be responsibilities of the property manager EXCEPT:

Accepted Answer

Liability for the property is typically the responsibility of the owner and not the property manager, as it is the owner who owns the property and assumes the risks of ownership. The other responsibilities listed, such as maintenance of financial accounts, general property management, and providing reports on property performance, are typically included in a management agreement.

Question 9

The lease is a contract between the owner and the tenant that transfers exclusive use and possession of the space to the tenant in return for rent or other consideration. In this arrangement, the owner is referred to as the:

Accepted Answer

The lessor is the owner of the property who is entering into the lease contract with the lessee. The lessee is the tenant who is being granted the exclusive use and possession of the space in exchange for rent or other consideration. The agent is not typically a party to the lease contract, and benchmark is not a relevant term in this context.

Question 10

With a performance-based management contract, an asset manager's fees are tied directly to the rate of return earned by investors on the portfolio of managed properties relative to a benchmark. In private commercial real estate, the choice of benchmarks for performance is limited in large part to return indices provided by which of the following organizations?

Accepted Answer

The National Council of Real Estate Investment Fiduciaries (NCREIF) provides widely used performance indices for private commercial real estate. These indices are based on actual investment performance data from institutional real estate investors and are considered the most reliable benchmark for private commercial real estate performance. Standard and Poor's provides benchmarks for public real estate investment trusts (REITs), while the National Association of Real Estate Investment Trusts (NAREIT) provides industry data and analysis for all types of REITs. Wilshire Associates provides investment consulting and analytics services but does not specialize in real estate performance benchmarks.

Question 11

When leasing nonresidential properties, owners would prefer to rent exclusively to high quality tenants. Such owners will tend to seek out companies whose general debt obligations are rated "investment grade" by one or more of the U.S. rating agencies. These potential tenants are more commonly referred to as:

Accepted Answer

The term used to describe high quality tenants whose general debt obligations are rated "investment grade" is credit tenants. These tenants are preferred by property owners when leasing nonresidential properties as they are considered to be reliable in terms of paying rent on time and maintaining the property. The other options, tenant reps, tenant mix, and in-house leasing agents, do not specifically describe high quality tenants with investment grade credit ratings.

Question 12

While some property owners choose to perform both the property and asset manager functions themselves, many commercial property owners choose to employ professional property managers instead. The property manager works under a management contract in which the manager is empowered to serve as the owner's fiduciary. This type of relationship is more commonly referred to as a(n):

Accepted Answer

An agency relationship refers to a situation where one party (the principal) gives another party (the agent) the authority to act on their behalf. In this case, the property owner is the principal who gives the property manager the authority to act as their fiduciary and manage the property on their behalf. Therefore, A is the correct answer. The other options, B, C, and D, do not accurately describe this type of relationship.

Question 13

Maintenance and repair of a property is an ongoing process that can be divided into four principal categories. Which of the following classifications includes ordinary repairs to a building on a day-to-day basis (e.g. repairing a broken window, fixing a leaking roof)?

Accepted Answer

Corrective maintenance refers to the repairs that are made to restore equipment, machinery, or systems to their proper operating condition. This includes fixing issues as they arise, such as repairing a broken window or fixing a leaking roof, which are examples of ordinary repairs on a day-to-day basis.

Question 14

The real estate industry applies which of the following labels to individuals who are responsible for the decisions that affect the physical, financial, or ownership structure of the property.

Accepted Answer

Asset managers are responsible for making decisions related to the physical, financial, and ownership structure of a property. They oversee the overall management of a real estate portfolio and make strategic decisions regarding acquisitions, dispositions, and leasing. Property managers are responsible for the day-to-day operations of a property, while leasing managers focus specifically on the leasing of rental units. Regional managers oversee multiple properties within a specific geographic region.

Question 15

While college-level courses are not widely available, a number of professional and trade organizations exist in the field of property management. Which of the following certifications awarded by the Institute of Real Estate Management is aimed at individuals who manage larger, residential, office, industrial, or retail properties?

Accepted Answer

The Certified Property Manager (CPM) certification from the Institute of Real Estate Management is aimed at individuals who manage larger, residential, office, industrial, or retail properties. The Accredited Resident Manager (ARM) certification is geared more towards individuals managing smaller residential properties, while the Real Property Administrator (RPA) certification focuses on asset management and building operations. The Member of Appraisal Institute (MAI) certification is not related to property management, but rather to real estate appraisal.

Question 16

Unlike many publicly traded stock and bond investments, commercial real estate investments:

Accepted Answer

Commercial real estate investments are known to yield returns mainly from the income generated by the asset as opposed to price appreciation. This income is called net operating income (NOI). Unlike stocks and bonds, they are not as volatile and have a slower rate of appreciation.

Question 17

Concerned with a potential information asymmetry problem, state legislators have been proactive in passing legislation that protects the rights and interests of tenants within which of the following property types?

Accepted Answer

The most likely property type to have tenants is apartments, so state legislators would be primarily concerned with protecting the rights of apartment tenants. Office, retail, and industrial properties may have tenants, but they are not as commonly associated with tenancy as apartments.

Question 18

The management agreement provides for a management fee that is usually in the range of 3 to 6% of which of the following measures of property income?

Accepted Answer

Effective gross income is typically used as the basis for calculating management fees in property management agreements. This income measure accounts for the actual income received from the property after accounting for vacancy and credit losses, providing a realistic basis for the fee calculation.

Question 19

A property management contract establishes an agency relationship between the manager and the owner. Considering that the management fee is often calculated as a percentage of gross income, this would seem to create an agency problem in that the agreement does not give managers the incentives to control operating expenses while they attempt to increase rental income. Though seldom the case, basing the property management fee on which of the following measures would, in theory, better align the interests of the owner and manager?

Accepted Answer

The Net Operating Income (NOI) is the income generated by the property minus all operating expenses like taxes, maintenance, and repairs. The property management fee that is based on the NOI would encourage the manager to minimize expenses while maximizing rental income. This would result in the manager working to increase the value of the property, benefiting both the owner and the manager, and reducing the agency problem.

Question 20

An owner whose property is in a strong market position, where fewer services can be offered to tenants for the same dollar of rental income and where the owner will not lose tenants if the property is under-maintained, is said to participate in a market that has:

Accepted Answer

A relatively inelastic demand for space means that tenants are willing to pay higher rents even if fewer services are provided and the property is under-maintained. This suggests that the property is in a strong position in the market and has bargaining power, indicating an inelastic demand for space.

Quiz 21: Managing Residential Rental Property