Real Estate 4000 Exam 3, REAL ESTATE EXAM 4, Test
2 Questions With Complete Solutions
Which of the following measures is considered the fundamental determinate of
market value for income-producing properties?
A. Net operating income
B. Potential gross income
C. Operating expenses
D. Capital expenditures
ans: A. net operating income
Net operating income is similar to which of the following measures of cash flow
in corporate finance?
A. Dividend yield
B. Earnings before deductions for interest, depreciation, income taxes, and
amortization (EBIDTA)
C. Price-earnings ratio
D. Discount rate
ans B. Earnings before deductions for interest, depreciation, income taxes, and
amortization (EBIDTA)
The process of converting periodic income into a value estimate is referred to as
income capitalization. Income capitalization models can generally be categorized
as either direct capitalization models or discounted cash flow models. Which of
the following statements best describes the direct capitalization method?
A. Value estimates are based on a multiple of expected first year net operating
income.
B. Appraisers must make explicit forecasts of the property's net operating income
for each year of the expected holding period.
C. Appraisers must select the appropriate yield at which to discount future cash
flows.
D. The forecast must include the net income produced by a sale of the property at
the end of the expected holding period.
ans: A. Value estimates are based on a multiple of expected first year net operating
income.
Value estimates are based on a multiple of expected first year net operating
income.
A. effective Gross Income
B. potential Gross Income
C. operating expenses
D. capital expenditures
ans; B
The distinction between market rent and contract rent is important due to
differences in lease terms. Office, retail, and industrial tenants most commonly
,occupy their space under leases that run:
A. one year or less
B. one to three years
C. three to five years
D. ten years or more
ans: C
The distinction between market rent and contract rent is important due to
differences in lease terms. Office, retail, and industrial tenants most commonly
occupy their space under leases that run:
A. The monthly rent remains fixed over the entire lease term.
B. The lease establishes schedule of rental rate increases over the term of the
lease.
C. Rental rate increases are indexed to the general rate of inflation.
D. Rental rates are a function of the sales of the tenant's business.
Ans: B
In calculating net operating income, vacancy losses must be subtracted from the
gross income collected. The normal range for vacancy and collection losses for
apartment, office, and retail properties is:
A. between zero and one percent
B. between one and five percent
C. between five and fifteen percent
D. between fifteen and twenty percent
A. between zero and one percent
B. between one and five percent
C. between five and fifteen percent
D. between fifteen and twenty percent
Ans: C
The expected costs to make replacements, alterations, or improvements to a
building that materially prolong its life and increase its value is referred to as:
A. operating expenses
B. capital expenditures
C. vacancy losses
D. collection losses
A. operating expenses
B. capital expenditures
C. vacancy losses
D. collection losses
Ans: B
Operating expenses can be divided into two categories: variable and fixed
expenses. Which of the following best exemplifies a fixed expense?
A. Utilities
B. Property management
C. Local property taxes
D. Trash removal
Ans: C
,Which of these is most likely to be regarded as a capital expenditure rather than
an operating expense?
A. Property taxes
B. Trash removal
C. Insurance payments
D. Roof replacement
A. Property taxes
B. Trash removal
C. Insurance payments
D. Roof replacement
Ans: D
Most appraisers adhere to an "above-line" treatment of capital expenditures. This
implies which of the following?
A. Capital expenditures are subtracted in the calculation of net operating income.
B. Capital expenditures are subtracted from net operating income to obtain a net
cash flow measure.
C. Capital expenditures are added to net operating income.
D. Capital expenditures are excluded from all calculations because they are
difficult to estimate.
A. Capital expenditures are subtracted in the calculation of net operating income.
ans: A
The going-in cap rate, or overall capitalization rate, is a measure of the
relationship between a property's current income stream and its price or value.
Which of the following statements regarding cap rates is true?
A. It is a measure of total return since it accounts for future cash flows from
operations and expected appreciation (depreciation) in the market value of the
property.
B. It is a discount rate that can be applied to future cash flows.
C. It is analogous to the dividend yield on a common stock.
D. It is the projected rate at which prices will appreciate in the future
Ans: C
For smaller income-producing properties, appraisers may use the ratio of a
property's selling price to its effective gross income. This is an example of a:
A. Net operating income
B. Going-out cap rate
C. Going-in cap rate
D. Gross income multiplier
A. Net operating income
B. Going-out cap rate
C. Going-in cap rate
, D. Gross income multiplier
Ans: D
Gross income multiplier analysis assumes that the subject and comparable
properties are collecting market rents. Therefore, it is frequently argued that an
income multiplier approach to valuation is most appropriate for properties with
short-term leases. Which of the following property types, therefore, would we find
it most appealing to use a gross-income multiplier in our analysis?
A. Apartments
B. Office
C. Industrial
D. Retail
A. Apartments
B. Office
C. Industrial
D. Retail
Ans: A
When using discounted cash flow analysis for valuation, the appraiser must
estimate the sale price at the end of the expected holding period. This price
(assuming selling expenses have yet to be accounted for) is referred to as the
property's:
A. net sale proceeds
B. selling expenses
C. terminal value
D. current market value
A. net sale proceeds
B. selling expenses
C. terminal value
D. current market value
Ans: C
When using discounted cash flow analysis for valuation, an appraiser will prepare
a cash flow forecast, often referred to as a:
A. restricted appraisal report
B. net operating income statement
C. direct market extraction
D. pro forma
A. restricted appraisal report
B. net operating income statement
C. direct market extraction
D. pro forma
Ans: D
When calculating the net operating income of a property, it is important to
identify any expenses that will be incurred in attempts to maintain the property.
All of the following would be considered operating expenses EXCEPT:
A. Property taxes
B. Property insurance premiums
2 Questions With Complete Solutions
Which of the following measures is considered the fundamental determinate of
market value for income-producing properties?
A. Net operating income
B. Potential gross income
C. Operating expenses
D. Capital expenditures
ans: A. net operating income
Net operating income is similar to which of the following measures of cash flow
in corporate finance?
A. Dividend yield
B. Earnings before deductions for interest, depreciation, income taxes, and
amortization (EBIDTA)
C. Price-earnings ratio
D. Discount rate
ans B. Earnings before deductions for interest, depreciation, income taxes, and
amortization (EBIDTA)
The process of converting periodic income into a value estimate is referred to as
income capitalization. Income capitalization models can generally be categorized
as either direct capitalization models or discounted cash flow models. Which of
the following statements best describes the direct capitalization method?
A. Value estimates are based on a multiple of expected first year net operating
income.
B. Appraisers must make explicit forecasts of the property's net operating income
for each year of the expected holding period.
C. Appraisers must select the appropriate yield at which to discount future cash
flows.
D. The forecast must include the net income produced by a sale of the property at
the end of the expected holding period.
ans: A. Value estimates are based on a multiple of expected first year net operating
income.
Value estimates are based on a multiple of expected first year net operating
income.
A. effective Gross Income
B. potential Gross Income
C. operating expenses
D. capital expenditures
ans; B
The distinction between market rent and contract rent is important due to
differences in lease terms. Office, retail, and industrial tenants most commonly
,occupy their space under leases that run:
A. one year or less
B. one to three years
C. three to five years
D. ten years or more
ans: C
The distinction between market rent and contract rent is important due to
differences in lease terms. Office, retail, and industrial tenants most commonly
occupy their space under leases that run:
A. The monthly rent remains fixed over the entire lease term.
B. The lease establishes schedule of rental rate increases over the term of the
lease.
C. Rental rate increases are indexed to the general rate of inflation.
D. Rental rates are a function of the sales of the tenant's business.
Ans: B
In calculating net operating income, vacancy losses must be subtracted from the
gross income collected. The normal range for vacancy and collection losses for
apartment, office, and retail properties is:
A. between zero and one percent
B. between one and five percent
C. between five and fifteen percent
D. between fifteen and twenty percent
A. between zero and one percent
B. between one and five percent
C. between five and fifteen percent
D. between fifteen and twenty percent
Ans: C
The expected costs to make replacements, alterations, or improvements to a
building that materially prolong its life and increase its value is referred to as:
A. operating expenses
B. capital expenditures
C. vacancy losses
D. collection losses
A. operating expenses
B. capital expenditures
C. vacancy losses
D. collection losses
Ans: B
Operating expenses can be divided into two categories: variable and fixed
expenses. Which of the following best exemplifies a fixed expense?
A. Utilities
B. Property management
C. Local property taxes
D. Trash removal
Ans: C
,Which of these is most likely to be regarded as a capital expenditure rather than
an operating expense?
A. Property taxes
B. Trash removal
C. Insurance payments
D. Roof replacement
A. Property taxes
B. Trash removal
C. Insurance payments
D. Roof replacement
Ans: D
Most appraisers adhere to an "above-line" treatment of capital expenditures. This
implies which of the following?
A. Capital expenditures are subtracted in the calculation of net operating income.
B. Capital expenditures are subtracted from net operating income to obtain a net
cash flow measure.
C. Capital expenditures are added to net operating income.
D. Capital expenditures are excluded from all calculations because they are
difficult to estimate.
A. Capital expenditures are subtracted in the calculation of net operating income.
ans: A
The going-in cap rate, or overall capitalization rate, is a measure of the
relationship between a property's current income stream and its price or value.
Which of the following statements regarding cap rates is true?
A. It is a measure of total return since it accounts for future cash flows from
operations and expected appreciation (depreciation) in the market value of the
property.
B. It is a discount rate that can be applied to future cash flows.
C. It is analogous to the dividend yield on a common stock.
D. It is the projected rate at which prices will appreciate in the future
Ans: C
For smaller income-producing properties, appraisers may use the ratio of a
property's selling price to its effective gross income. This is an example of a:
A. Net operating income
B. Going-out cap rate
C. Going-in cap rate
D. Gross income multiplier
A. Net operating income
B. Going-out cap rate
C. Going-in cap rate
, D. Gross income multiplier
Ans: D
Gross income multiplier analysis assumes that the subject and comparable
properties are collecting market rents. Therefore, it is frequently argued that an
income multiplier approach to valuation is most appropriate for properties with
short-term leases. Which of the following property types, therefore, would we find
it most appealing to use a gross-income multiplier in our analysis?
A. Apartments
B. Office
C. Industrial
D. Retail
A. Apartments
B. Office
C. Industrial
D. Retail
Ans: A
When using discounted cash flow analysis for valuation, the appraiser must
estimate the sale price at the end of the expected holding period. This price
(assuming selling expenses have yet to be accounted for) is referred to as the
property's:
A. net sale proceeds
B. selling expenses
C. terminal value
D. current market value
A. net sale proceeds
B. selling expenses
C. terminal value
D. current market value
Ans: C
When using discounted cash flow analysis for valuation, an appraiser will prepare
a cash flow forecast, often referred to as a:
A. restricted appraisal report
B. net operating income statement
C. direct market extraction
D. pro forma
A. restricted appraisal report
B. net operating income statement
C. direct market extraction
D. pro forma
Ans: D
When calculating the net operating income of a property, it is important to
identify any expenses that will be incurred in attempts to maintain the property.
All of the following would be considered operating expenses EXCEPT:
A. Property taxes
B. Property insurance premiums
