RSM 484 - REAL ESTATE FINANCE AND INVESTMENTS MID TERM EXAM ‘Student Number: 004770688 65 Short Answer and True /False questions to be answered on your own word document and sent back within the 2 hour maximum allocated time. Calculator permitted. Closed book. All questions worth 1 point unless otherwise stated. I confirm that my conduct during this exam adheres to the Code of Behaviour on Academic ‘Matters. | confirm that I did NOT act in such a way that would constitute cheating, misrepresentation, or unfairness, including but not limited to, using unauthorized aids and assistance, personating another person, collaborating with a classmate, and committing plagiarism. 1. Whatis the future value of $1,000 compounded quarterly for 8 years at 12%? N= 32, PV= $1000, CPT FV =$2575.08 35% 2. How much would you pay today for a bond that pays $0 annually but earns 8% annually for the next four years and has a face value at maturity of $13,500? Nz 4, FV= $18,500, |= 8% CPT PV =$9922.90 3. What is a co-tenancy clause? ‘Aco-tenancy clause something that is written/negotiated to be in the lease of a smaller tenant relative to an anchor tenant, which requires that the anchor does not “go dark” and is present, this is due to the anchor having the ability to bring in much more traffic and these smaller tenants tend to suffer if anchors “go dark” 4. Income that is available to pay expenses after adjusting for a vacancy allowance is commonly referred to as: Effective Gross Income, as this is the amount ust after adjusting for vacancy and before deducting for expenses 5. Under a“net" lease, operating expenses are the obligation ofthe: Under a net lease, operating expenses are the obligation of the tenant, not the landlord 6. What does the term "inne tenants’ mean? Inline tenants refers to smaller tenants in regional malls that are amongst anchor tenants 7. Identity a component of a property that is not depreciable.‘Acomponent of a property that is not depreciable is the land that the property is on 8. Aproperty produces a first-year net operating income of $24,000. Because of the long economic life of the building, the income is considered a perpetuity that will grow by 2.0% per year. Using a discount rate of 9.5%, the property value is: ($24,000)/(0.095 - 0.02) = $320,000 9. Fora stabilized property, the terminal capitalization rate used in financial valuation models is, typically than the going-in capitalization rate (choose one of higher or lower): Higher 10. Whatis an estoppel? ‘An estoppel is typically a certificate document completed by the tenant to confirm the negotiated terms that they have contractually agreed to including rent and reimbursements to landlord 11, Which expense is deductible for income taxes but not deducted in calculating net operating income? Depreciation 12. An apartment building has a potential gross income of $25,000. Vacancy and collection losses are 5 percent. Operating expenses are 30 percent of effective gross income. Ita capitalization rate of 12 percents derived from market transactions of similar properties, the market value of the apartment building is: ($25,000 x 0.95) x0.7 = $1625 $16625/0.12 = $138,541.67 = Market value of apartment building 13, You own a property that will need a new roof in 10 years. Ifyou establish a capital reserve account and invest $2,000 per month atthe beginning of each month which earns 3% annually, how much would you expect to have in 10 years? CPT FV $280,181.54 Annuity Due 14, 33. An office building has the following yearly cash flows: 1 2 3 4 5 € ‘$600,000 [$850,000 [$850,000 __[ $850,000 | $900,000 __| $10,950,000 Ifthe discount rate is 11%, the present value of the cash flows is:Entered values into CF and CPT PV =$8,800,276.96 15, Draw a graph is mostly like to fit the long-term return distribution of a large office building with {95% occupancy and many diversified tenants in a strengthening market? fees too ot ce hwns, xcs fi" Al gL wp BP 337- Grpecked came veg 16. A 150,000 sf building rests on an acre which has an FAR of 6. How many more square feet can be builton the parcel? (43,560 x6) -150,000= 111,360 square feet (more) 17. Whattype of tenantis mostlikely tobe an anchor ina strip mall? Anchors are large retalstores such as Safeway or Whole foods (Grocery store) 18, Whatisa flexbuilding? ‘A flex building is a type of “warehouse / industrial property” that is typically multifunctional and used for office, warehousing and manufacturing 19, Namealease clause that retail tenants prefer and landlords prefer to avoid,20. Assuming stable cash flows, when modeling a property, the going-in cap rate should be than the exit cap rate (choose one of higher or lower): Lower 21. Name three items that would appear on a ttle report. (3 pts) Information on: - Previous ownership of property - Previous usage of property - Previous improvements (Cap Ex) made on property 22. Ifrents are slated to grow at 2% in perpetuity and the discount rate is 9%, what isthe theoretically appropriate cap rate according o the Gordon Modelifthe risk free rate is 2%. 9% -2962=7% 23. Why mighta seller's cap rate differ rom a buyer's cap rate? (give 3 reasons) (3 pts) Typically, a seller and buyer's cap rate differ due to their assumptions = Utilizing NOI from different years in calculation - Having differentinterpretation of stabilized NOI - _ Differentestimates of NOI 24. Using an 9% discount rate, what is the present value of end-of-year cash flows of $5,000 for 25 years, withthe first cash flow received 5 years from today? CPT PV (with discounting back toto) =%31,920.01 25. What characteristics are indicative of a Class ‘A’ Office building? (give 3) (3 pts) - Modern design and amenities - Performs well in market regardless of if market is strong or weak = Welllocated 26. What is an anchor tenant? ‘An anchor tenant is typically a larger tenant and therefore is the “anchor of your property and itself brings in a lot of traffic as their brand and offerings will attract customers to the property, an example would be Walmart 27. What is an easement? (3 items)(3 pts) 28. What are three characteristics of replacement cost? (3 pts)- An hypothetical amount it would take to acquire the land and property today including the costs of attaining the same tenant profile - Illustrates competitor's barrier to entry - _ Illustrates whether if previous developer or acquirer had overpaid for land or property (in their potential speculation) 29. What is the property value using the direct capitalization approach and the Gordon Growth Model where NOI - $1.2 million, Cap Rate — 8%, Discount Rate — 10%, Growth Rate - 3% $17,142,857.14 = property value 30. What potential operating cost synergies can you have when owning a number of real estate assets? Are these synergies dependent on the geographic location of the assets? (4 pts) They are dependent on the geographic location of assets 31. Whatis the difference between gross square footage and net leasable square footage? (2 pts) Common Area 32. Whats the difference between economic and physical occupancy? (2 pts) Economic occupancy is the space that is currently generating rent but may not be physically occupied Physically occupancy is the space that is physically occupied, regardless of it generates rent or not 33. What is an anchor tenant? ‘An anchor tenant i typically a larger tenant and therefore is the “anchor of your property and itself brings in a lot of traffic as their brand and offerings will attract customers to the property, an example would be Walmart 34, What is Triple Net Rent’? Atriple Net lease (NNN) is a lease where the tenant typically pays for all operating expenses like: utilities, insurance, taxes as well as their rent 35. What is a common source of differences between reported cap rates? Common source of differences between reported cap rates come with the assumptions, = Using NOI from different years - Different definitions of stabilized NOI - Different forecast results in NO! 36. Whats the difference between a cap rate and a multiple? ‘The capitalization rate is the reciprocal of a muttiple (i.e. 1/multiple)37. Calculate the value of a building that has a $1.5 million stabilized NOI at an 8% cap rate? $1,500,000/0.08 = $18,750,000 = value of building 38. A building has a $3 Million stabilized NOI and was recently sold at $21.6 Million. At what cap rate was the building sold? How much risk premium does this building have over a 10 year treasury note that yields 2.6% (pts)? Building sold at cap rate of = 3,000,000/21 600,000 = 13.89% cap rate Risk premium = 13.89% - 2.6% 1.29% 39. Does a seller prefer higher or lower cap rates? Explain your reasoning. (2pts) ‘Aseller prefers lower cap rates as this represents a high price paid per dollar of NOI (ie. more value) 40. What is replacement cost? When is it sed? (2 pts) ‘A replacement cost gives an estimate based on today's market, how much it would cost to aquired the property, including land acquiring costs that would attract the same tenant profile (so includes TI and LC), this is used as an analysis tool to illustrate competitors barrier to entry today and to compare to the price you would pay and see if itis at a discount or premium 41, When should the Gordon Model be used in a property pro forma? The Gordon Models a growing perpetuity and you should use it when you want a simplified and faster estimate instead of doing a long DOF 42. Which structures is most likely to be structured with an promote fee for the sponsor? Retail structures are most likely to be structured with an promote fee 43. What are the NCREIF and NAREIT indices (2 pts)? NCREIF: is the National Council of Real Estate Investment Fiduciaries which is an index that illustrates quarterly earnings data for privately owned real estate properties owned and operated on behalf of institutions NARIET: is the National Association of Real Estate Investment Trust which is an index that illustrates earnings data on publicly traded REITs (Real Estate Investment Trusts) and itreflects thelr stock prices 44, What are the four methods to value a building (4 pts)? = Discounted Cash Flow + Capitalization Rate - Gordon Growth Model - Comparable Property Analysis45. Which potential operating cost synergies can you have when owning a number of real estate assets? (provide 3) (3 pts) - Experience - Management 46. The ratio of a buildings above grade gross floor to the area of the lot is known as: Floor area Ratio (FAR) 47. Using 8% discount rate and 6.5% terminal cap rate what is the value of a property with the following cash flows. Year 1: 1,000,000, Year 2: $1,500,000, Year 3: $2,000,000, Year 4 2,250,000, Year 5: 2,750,000, Year 6: 3,000,000 48. Whats a ‘radius restriction ‘The ‘radius restriction’ is a type of clause that protects the landlord where the tenant cannot open another store within a certain radius of the one at the landlord's property as ifa store like Starbucks opened a store very close by, this could hurt the overall traffic in the landlord's property, this is typically ‘more common for anchor tenants 49. What are three key financial performance indicators for real estate investing? (3 pts) = Internal rate of return, - Net present value - Multiple on equity 50, Whatis due diligence? (provide 2 items) (2 pts) ~ Financial analysis: revenue, debt (covenants and encumberment) and expenses - Non-Financial analysis: Neighborhood, legal, market 51, Whatis an IRR. and what wilt not tell you about the property? (2 pts) IR will not tell you about: ~The size of the projecvinvestment ~The timing of the cash flows 52. What are the four main institutional real estate investment vehicles? (4 pts) - Core - Core plus - RealEstate Investment Trust, ~ Value Add Funds83. Under what market conditions would higher leverage not necessarily translate to a higher investment IRR? Under weak market conditions higher leverage would not translate to a higher investment IRR 54. What are the qualitative differences between the four institutional investment vehicles (Core, Core Plus, REITs and Value-Add Funds)? (Give 4) (4pts) 55. Whats another name for landlord? Lessor 56. What is another name for a tenant? Lessee For the questions below (57-64), please answer if the statement is true or false: 57. The capitalization rate of a newly constructed apartment building will be higher than that of relatively old apartment building, which is comparable in all other aspects. False 58. Capital expenditures are not part of the operating expenses and appear below the NOI line. True 59. Use of leverage to acquire income producing property increases the probability of going bankrupt, True 60, An unleased property always worth ess than ifthe same property was fully eased. False 61. Lenders have a contractual ceiling on the return they can receive from lending on a property True 62. The diference between economic and physical occupancy is called shadow vacancy. True 63. You can generate the same IRR with two different income streams?True 64, An equity IRR is synonymous with levered IRR? True 65. Acronyms are a large part of being conversant in Real Estate. Write out the words mostly commonly associated with these real estate acronyms and provide a brief definition of each term (1 Point Each) PGI-Potential Gross income NOI-Net Operating Income IRR Internal Rate of Return Cap Ex- Capital Expenditures EGI-Effective Gross Income TOR—Terminal Capitalization Rate NNN-Triple NetLease LTV-Loamto-Value NPV-NetPresent Value DCF Discounted Cash Flow NER-NetEffective Rent NRA-NetRentable Area GBA~ Gross Building Area PSF—Per Square Foot