Question 1

At the end of 2011,commercial banks and other financial institutions collectively owned $51 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 commercial real estate equity obtained by banks and financial institutions is mainly due to the borrower default and foreclosure of real estate properties. This means that the institutions had to take possession of the properties because the borrower failed to fulfill their obligations, resulting in the institutions owning the real estate.

Question 2

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

D

Question 3

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

Accepted Answer

While the syndicator may be involved in raising additional investment capital, it is not necessarily their sole responsibility during the origination phase. The other three choices are critical responsibilities of the syndicator during this phase: developing the concept for the syndication, organizing the legal entity, and acquiring or obtaining control of the real estate.

Question 4

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

The reemergence of 1031 exchanges led to an increase in the use of tenancy-in-common ownership, as it allows for multiple investors to pool their resources and purchase like-kind replacement properties. General partnerships, limited liability companies, and limited partnerships are all types of ownership structures that can also utilize 1031 exchanges, but the increase in the popularity of tenancy-in-common is the most notable.

Question 5

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

C Corporations are subject to double taxation, meaning the corporation pays taxes on its profits, and then shareholders pay taxes on the dividends they receive. This can result in a higher overall tax burden for shareholders. Subchapter S Corporations, General Partnerships, and Limited Liability Companies all offer pass-through taxation, meaning profits and losses are passed through to the individual owners' tax returns and are only taxed once. Therefore, the best choices would be Subchapter S Corporations, General Partnerships, or Limited Liability Companies.

Question 6

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 not centralized and transactions are usually negotiated individually, which results in higher transaction costs. The lack of a centralized market also means that there is less public information available and therefore less liquidity. Therefore, private markets are characterized by high transaction costs and low liquidity.

Question 7

Of the $3.2 trillion in outstanding mortgage debt in the U.S. ,approximately 714% is privately held by institutional and individual investors.Which of the following institutions 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.

Question 8

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 a General Partnership. In a general partnership, all partners are personally liable for the debts and obligations of the partnership. Therefore, if the partnership is sued or can't pay its debts, the partners could be held personally liable and could potentially have their personal assets seized. A C Corporation, Subchapter S Corporation, and Limited Partnership all offer limited liability protection to their shareholders or partners.

Question 9

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 is the concern that the agent may act in their own best interest rather than in the best interests of the principal. Adverse selection refers to the problem of asymmetric information, where one party has more information than the other. Dual agency refers to a situation where an agent represents both the buyer and seller in a transaction, which can create a conflict of interest. Signaling refers to an action taken by one party to convey information to another party, such as a seller lowering their price to signal that they have low-quality goods.

Question 10

The $6.5 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

According to the information given in the question, the total market value of commercial real estate can be broken down into four quadrants: public equity, privately held equity, publicly traded mortgage debt, and privately held mortgage debt. The question asks which sector currently accounts for the largest proportion of market value, and the answer is likely to be either public equity or privately held equity, as these two sectors typically make up the majority of the commercial real estate market. However, the question does not give any specific data on the current proportions of each sector, so we cannot definitively choose between these two options. The other two sectors (publicly traded mortgage debt and privately held mortgage debt) are typically smaller than the equity sectors and are therefore less likely to be the correct answer. Therefore, we can reasonably assume that the best choice is B, privately held equity, as this sector is generally larger than publicly traded equity and is therefore more likely to be the largest proportion of market value.

Question 11

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 12

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

The responsibility of preparing the properties for sale falls under the completion phase of a real estate syndicate's life, not the operation phase. The other responsibilities listed, managing the syndication, managing properties, and raising additional investment capital, are all tasks that the syndicator would typically be responsible for during the operation phase.

Question 13

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 utilize commingled real estate funds for approximately one-half of their investments in real estate.

Question 14

The estimated market value of investible commercial real estate in the United States at the end of 2011 was approximately $6.5 trillion.In terms of market size,which of the following asset categories is most closely related to commercial real estate?

Accepted Answer

The answer of The estimated market value of investible commercial...

Question 15

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 apartments. They own and manage these properties to generate rental income and potentially capital appreciation. Option A is incorrect as Equity REITs do not invest a significant percentage of their assets in mortgages. Option C is incorrect as this describes Mortgage REITs. Option D is incorrect as Equity REITs do not purchase ownership interests in shares of pension funds and life insurance companies.

Question 16

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, but the market collapsed in 2008. Real estate investment trusts (REITs) and construction loans were also sources of funding, but they did not experience the same level of growth as CMBS during this time period. Residential mortgage backed securities (MBS) are a type of funding for residential mortgages, not commercial mortgages.

Question 17

Though difficult to accurately measure,the market value of U.S.real estate held by non-real estate corporations is estimated to exceed $10 trillion.All of the following are examples of noninvestible commercial real estate EXCEPT:

Accepted Answer

The assembly plant building owned by a group of investors as part of an LLC is considered investible commercial real estate, unlike the other options which are owned by corporations for their own use.

Question 18

As of 2011,nearly 88% of private commercial real estate equity was owned by "noninstitutional investors." Which of the following investor categories represents the most common form of noninstitutional ownership?

Accepted Answer

Local syndications and private equity funds are the most common form of noninstitutional ownership of private commercial real estate equity. These groups are typically made up of individuals, families, or small investment groups who pool their resources to invest in real estate projects. Pension funds and life insurance companies are considered institutional investors, while sole proprietorship ownership of commercial real estate is relatively rare.

Question 19

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 20

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

The answer of There are a set of restrictive conditions...

Quiz 17: Sources of Commercial Debt and Equity Capital