Exam 5: Inside the City II: A Closer Look

All of the following are strategic reasons to use financial leverage when investing in real estate, except:

All of the following are arguments against using leverage, except:

In the problem above, what is the after-tax cash flow to the equity investor if the income tax rate is 35%?

The difference between the net operating income NOI) and the equity before-tax cash flow EBTCF) is:

An investor believes that a certain property is worth $10,000,000. The seller refuses to sell it for that amount, but has offered to provide a 5-year interest-only loan for $5,000,000 at 4% interest annual payments at the ends of the years, first payment due in one year). Market interest rates on such a loan are currently 6.5%. How much should the investor be willing to pay for the property from an investment value perspective taking the loan deal) if the investor faces a 30% marginal income tax rate?

In a certain real estate market the net cash flows are level perpetuities no growth), the going-in IRR at the market price of the assets is 8% at the PBT level, and the marginal investors, who face an effective tax rate of 20% with or without leverage), typically use perpetual 50% LTV loans which are maintained perpetually at 50% LTV) that have a market interest rate of 6%. Ignoring depreciation, what is the market's levered after-tax opportunity cost of capital for these types of properties?

Which statement is true ex ante?

A non-residential commercial property which cost $500,000 is considered to have 30 percent of its total value attributable to land. What is the annual depreciation expense chargeable against taxable income?

If the Treasury Bond yield is 7% and the required return on property unlevered) is 11%, then what is the required total return riskfree rate plus risk premium) on the equity investment with a 50% Loan/Value Ratio?

The Donald Grump Corporation, a publicly-traded REIT, has expected total return to equity of 13%, average interest rate on their debt of 7.5%, and a Debt/Total Asset Value ratio of 40%. What is Grump's firm-level) average cost of capital?

The NOI is $40,000; there are $5,000 in tenant improvement expenditures paid for by the landlord; there is a $200,000 interest-only loan at 8 percent annual interest; the depreciable cost basis of this residential property is $300,000; the owner's tax bracket is 33 percent. What is the Equity After-Tax Cash Flow EATCF)?

Suppose a property has a cap rate of 10% and you can borrow at a mortgage constant of 11%. If you borrow 75% of the property price, what will be your equity yield?

If there is 12% risk in a property investment with no leverage, then how much risk is there if the Leverage Ratio is 3?

The "Equity" in a real estate investment refers to:

The NOI is $850,000, the debt service is $600,000 of which $550,000 is interest, the depreciation expense is $350,000. What is the Before-tax Cash Flow to the equity investor EBTCF) if there are no capital improvement expenditures or reversion items this period?

"Negative Leverage" implies:

If tax-exempt institutions pass on to borrowers in the real estate investment market a significant share of the tax shields they have, then what empirical evidence of this would we expect to see?

The "Leverage Ratio" equals:

Use the following information and the APV decision rule, to answer the following questions. A seller has offered you a $1,500,000 interest only 7 year loan at 6% annual payments), when market interest rates on such loans are 7%. You face a 35% marginal income tax rate. a) Basing your decision on market values, how much more should you be willing to pay for the property than you otherwise think it is worth, due to the financing offer? b) Answer the same question only now basing your answer on investment value rather than market value.

A non-residential commercial property which cost $500,000 is considered to have 30 percent of its total value attributable to land. The annual depreciation expense chargeable against taxable income is: