NAME: _______________________________

BSAD 295: Real Estate Finance

Final Exam

I. Multiple Choices (40%)

(   c   ) 1. Given the following information, what is the required equity down payment? Acquisition price: $800,000; loan-to-value ratio: 75%; up-front financing cost: 3%.

a.       $118,000.

b.      $200,000.

c.       $218,000.

d.      $250,000.

(   b   ) 2. Single-year ratios can be preferred over discounted cash flow (DCF) valuation methods because single-year ratios

            a.   cannot be manipulated to produce a better overall result from the analysis.

            b.   are more easily calculated and more widely understood than DCF methods.

            c.   use before-tax cash flow estimates from a subsequent sale in the future to determine the investment’s overall desirability.

            d.   do not require alternative explanations for comparatively low multipliers.

(   a   ) 3. Given the following information, what is the total amount of annual operating expenses for this property?

            Lawn care: $10,000; income taxes: $24,000; maintenance: $35,000; janitorial: $25,000; security: $32,000; debt service: $145,000.

            a.    $102,000

            b.    $126,000

            c.    $195,000

            d.    $247,000

(   b   ) 4. Find the going-out cap rate given the following information:

            Holding period: 5 years; 1^st year NOI: $120,000; 6^th year NOI: $155,250; annual operating expenses: 38%; expected sale price: $1,350,000; expenses of sale: 7%.

            a.    12.4%

            b.    11.5%

            c.    7.7%

            d.    7.1%

(   a   ) 5. In a mortgage loan, the borrower always conveys two documents to the lender. They are a 

            a.    note and a mortgage.

            b.    note and an appraisal.

            c.    mortgage and an appraisal.

            d.    check and a mortgage.

(   b   ) 6. Fannie Mae and Freddie Mac operate in which mortgage market?

            a.    primary market

            b.    secondary market

            c.    third market

            d.    none of the above

(   a   ) 7. Calculate the lender’s yield given the following information:

            Loan amount: $166,950; term: 30 years;         interest rate: 8 %; payment: $1,225.00; discount points: 2.

            a.    8.2 %

            b.    10.1 %

            c.    6.5 %

            d.    7.7 %

(   a   ) 8. First National Bank “locked in” an interest rate for Bob of 8.5%. At the time of the closing, the market interest rate had risen to 9.25 %. This is an example of

            a.    interest rate risk.

            b.    fallout risk.

            c.    collateral risk.

            d.    loan risk.

(   b   ) 9. The most profitable activity of residential mortgage bankers is typically:

a.       loan origination.

b.      loan servicing.

c.       loan sales.

d.      loan brokerage activities.

(   c   ) 10. Given the following information, what is the balloon payment at the end of a 7-year partially amortized mortgage?

            Loan amount: $84,000

            Term: 30 years

            Interest rate: 4.5%

            Payment: $425.62

            a.    $65,135

            b.    $68,991

            c.    $73,102

            d.    $75,301

II. Essays/Calculations (60%)

1. Why might a commercial real estate investor borrow to help finance an investment even if she could afford to pay 100 percent cash?

2. You are considering the purchase of an apartment complex.  The following assumptions are made:

•           The purchase price is $1,000,000.

•           Potential gross income (PGI) for the first year of operations is projected to be $171,000.

•           PGI is expected to increase at 4 percent per year.

•           No vacancies are expected.

•           Operating expenses are estimated at 35 percent of effective gross income. Ignore capital expenditures.

•           The market value of the investment is expected to increase 4 percent per year.

•           Selling expenses will be 4 percent.

•           The holding period is 4 years.

•           The appropriate unlevered rate of return to discount projected NOIs and the projected NSP is 12 percent.

•           The required levered rate of return is 14 percent.

•           70 percent of the acquisition price can be borrowed with a 30-year, monthly payment mortgage.

•           The annual interest rate on the mortgage will be 8.0 percent.

•           Financing costs will equal 2 percent of the loan amount.

•           There are no prepayment penalties.

(a) Calculate net operating income (NOI) for each of the four years, (b) calculate the net sale proceeds from the sale of the property, and (c) calculate the net present value of this investment, assuming no mortgage debt.  Should you purchase?  Why?

3. Please discuss the process of development.

4. Five years ago you borrowed $100,000 to finance the purchase of a $120,000 house. The interest rate on the old mortgage is 10%.  Payment terms are being made monthly to amortize the loan over 30 years. You have found another lender who will refinance the current outstanding loan balance at 8% with monthly payments for 30 years. The new lender will charge one discount point on the loan.  Other refinancing costs will equal $3,000.  There are no prepayment penalties associated with either loan.  You feel the appropriate opportunity cost to apply to this refinancing decision is 9%. (a) What is the monthly payment on the old loan? (b) What should be the monthly payment on the new loan? (c) Should you refinance today if the new loan is expected to be outstanding for ten years?

5. On the following loan, what is the effective borrowing cost if the loan is prepaid in 6 years?

Loan amount: $200,000.

Interest rate: 6%.

Term: 20 years. 

Up-front costs: 7% of the loan amount.

6. (a) Please discuss the 6 components of the cost of ownership using plain English.  For this, I do not want to see a formula.  (b) If the cost of owning is lower than the cost of renting, what is the implication on house prices?