Institute of Real Estate

NYU Schack Institute of Real Estate School of Continuing and Professional Studies The Real Estate Institute 11 West 42nd Street, New York, NY 10036 Real Estate Finance – REAL1-GC.1035 Final Examination 1. 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? a) $10,000,000 b) $10,383,588 c) $10,403,023 d) $10,519,460 e) Insufficient information to answer the question. 2. 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”? a) Both investment value and market value are $400,000. b) Both investment value and market value are $500,000. c) Investment value is $400,000 and market value is $500,000. d) Investment value is $500,000 and market value is $400,000. 3. Suppose the risk free 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 risk free rate, what Loan/Value ratio must you obtain for this real estate investment to meet your target expected return? a) 0% b) 25% c) 50% d) 75% e) 80% 4. 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? a) 7.00% b) 8.25% c) 10.00% d) 11.00% e) Cannot be determined from the information given. 5.

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: a) The advantage of Loan A is lower monthly payments and lower balloon payment at maturity. b) The advantage of Loan B is lower monthly payments and lower balloon payment at maturity. c) The advantage of Loan A is lower monthly payments but its disadvantage is a higher balloon at maturity. d) The advantage of Loan B is lower monthly payments but its disadvantage is a higher balloon at maturity. 6. 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%? a) $2,789,406 b) $3,409,091 c) $3,844,614 d) $4,000,000 e) $4,139,619 7. 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? a) $2,789,406 b) $3,409,091 c) $3,844,614 d) $4,000,000 e) $4,139,619 8. 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? a) $1,306,430 b) $1,314,051 c) $1,378,960 d) Cannot be computed with the information given. 9. 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).