Exam 11: Nuts and Bolts for Real Estate Valuation: Cash Flow Proformas and Discount Rates

The opportunity cost of capital discount rate) applicable on an unlevered basis to assets that are not yet leased up "speculative built properties") is best described as:

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Question 1

Correct Answer:

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Is it appropriate, and if so, why is it appropriate, to apply a riskless or nearly riskless OCC to construction cost cash flows in the typical development project?

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Question 2

Correct Answer:

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Yes, it is appropriate, because construction costs either have little volatility or they are typically not much correlated with financial markets, giving them effectively little risk that cannot be diversified away, hence, little risk that would be "priced" in the capital markets).

Yes, it is appropriate, because the opportunity cost of capital is an expected return, not the contract interest rate on the construction loan. Because of the possibility of loss under default of the construction loan, the construction lender actually faces an expected return on the loan that is substantially below the contract interest rate on the loan, which effectively makes the expected return only slightly above the riskfree rate.

All of the following are typical types of real options found in development projects or developable land ownership, except:

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Question 3

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Suppose a construction project anticipates end-of-month draws of $400,000, $300,000, and $600,000 consecutively. What will be the balance owed at the end of the third month if the interest on the loan is 7% per annum nominal annual rate, compounded monthly), and no payments of either principal or interest are required during the construction period?

(Multiple Choice)

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Question 4

Why is it that construction loans are almost always used to finance all or most of the construction costs in a development investment, even when the investor has plenty of cash that could be used to pay for construction?

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Question 5

What are the major line items in the operating budget of a development project, and why does it usually make sense for such a budget to consider only a single year's operation of the building?

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Question 6

Suppose the riskfree rate of return is 7%, and the expected total return on the property free & clear is 11%, and you have a target total expected return of 15%. Assuming you can borrow at the riskfree rate, what Loan/Value ratio must you obtain for this real estate investment to meet your target expected return?

(Multiple Choice)

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Question 7

The replicating portfolio of a development option land) consists of:

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Question 8

Provide a complete definition of each term or phrase -Back-door feasibility analysis:

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Question 9

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? Ch15)

(Multiple Choice)

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Question 10

For the same property as above, suppose the underwriting criteria is a maximum loan/value ratio LTV) of 75%, and we estimate property value by direct capitalization using a rate of 11% on the stated NOI. By this criterion what is the maximum loan amount?

(Multiple Choice)

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Question 11

Two loans have the same interest rate and maturity. Loan A has a 15-year amortization rate. Loan B has a 30-year amortization rate. In comparing these two loans from a borrower's perspective:

(Multiple Choice)

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Question 12

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?

(Multiple Choice)

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Question 13

Provide a complete definition of each term or phrase -Phased risk regimes in development projects):

(Essay)

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Question 14

Consider an 8.5% loan amortizing at a 25-year rate with monthly payments. What is the maximum amount that can be loaned on a property whose net operating income NOI) is $500,000 per year, if the underwriting criteria specify a debt service coverage ratio DCR) no less than 125%?

(Multiple Choice)

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Question 15

Based on the following information, develop a front door "Simple Financial Feasibility Analysis" SFFA) for this project estimating the required minimum market gross rent per SF that will support development. • 40,000 NRSF office building project. • Acquisition & construction cost = $1,500,000; • Estimated operating costs to landlord) = $100,000/yr. • Projected stabilized occupancy = 95%. • Permanent loan available on completion @ 9% interest-only loan) with 130% debt service coverage requirement on the net operating income, and 75% maximum loan-to-value ratio. Show your work.

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Question 16

A property has a McDonald's restaurant on it, which can earn $50,000 per year. In any other use including another brand of restaurant), the most it can earn is $40,000 per year. Assuming a discount rate of 10% and constant cash flow in perpetuity, what is the "investment value" of this property to McDonalds, and what is its "market value"?

(Multiple Choice)

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Question 17

Consider the investment evaluation of a real estate development in which the property to be built is projected to reach stabilized occupancy at the end of Year 2 two years from the time the investment decision must be made and construction will begin). The project is speculative in that there are no leases signed as of Time Zero the present, when the investment decision must be made). The property level opportunity cost of capital is considered to be 9% for stabilized investments, and 10% for assets not yet stabilized lease-up investments). Which of the following is true?

(Multiple Choice)

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Question 18

Showing 1 - 18 of 18

The opportunity cost of capital discount rate) applicable on an unlevered basis to assets that are not yet leased up "speculative built properties") is best described as:

Is it appropriate, and if so, why is it appropriate, to apply a riskless or nearly riskless OCC to construction cost cash flows in the typical development project?

All of the following are typical types of real options found in development projects or developable land ownership, except:

Why is it that construction loans are almost always used to finance all or most of the construction costs in a development investment, even when the investor has plenty of cash that could be used to pay for construction?

What are the major line items in the operating budget of a development project, and why does it usually make sense for such a budget to consider only a single year's operation of the building?

The replicating portfolio of a development option land) consists of:

Provide a complete definition of each term or phrase -Back-door feasibility analysis:

For the same property as above, suppose the underwriting criteria is a maximum loan/value ratio LTV) of 75%, and we estimate property value by direct capitalization using a rate of 11% on the stated NOI. By this criterion what is the maximum loan amount?

Two loans have the same interest rate and maturity. Loan A has a 15-year amortization rate. Loan B has a 30-year amortization rate. In comparing these two loans from a borrower's perspective:

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?

Provide a complete definition of each term or phrase -Phased risk regimes in development projects):

Consider an 8.5% loan amortizing at a 25-year rate with monthly payments. What is the maximum amount that can be loaned on a property whose net operating income NOI) is $500,000 per year, if the underwriting criteria specify a debt service coverage ratio DCR) no less than 125%?

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