LOMA 357

Chapter 9
Reference: c. 9, pp. 3-4
The following statements are about property characteristics for real estate investing.
Three of the statements are true, and one of the statements is false. Select the answer
choice containing the FALSE statement.

A. Generally, a secluded rural resort property has more potential buyers than does a
commercial office space in a growing urban center.
B. Converting a property from its past use to a new use is likely to change the
property’s value.
C. Residential and commercial property values are quoted by square footage, such
as $150 per square foot.
D. A bondable lease requires a tenant to pay a stated rent plus every cost possibly
associated with the property.
Reference: c. 9, p. 4
The value of real estate depends on many property characteristics, including the
type of lease. The type of lease in which a tenant is required to pay property
taxes, building insurance, and repairs and maintenance is known as a (single-net /
triple-net) lease. Generally, this type of lease is available on (residential /
commercial) real estate.

A. single-net / residential
B. single-net / commercial
C. triple-net / residential
D. triple-net / commercial
Reference: c. 9, p. 5
Margie Naud, a real estate appraiser, conducted the following appraisals for an institutional investor:

● Property A—Ms. Naud estimated the market value of Property A by considering how much it would cost to buy the
land and rebuild the buildings, including improvements, on the land, adjusting for depreciation.
● Property B—Ms. Naud estimated the market value of Property B by looking at similar properties that were sold within
the last year and adjusting the prices of those properties for differences in the age, features, condition, market
conditions, and location.

From the answer choices below, select the response that correctly identifies the type of real estate appraisal that Ms. Naud
used to estimate the market value for each property.

Property A Property B

A. cost method income capitalization method

B. cost method comparables method
C. liquidation value appraisal income capitalization method
D. liquidation value appraisal comparables method
Reference: c. 9, p. 5
Approaches for establishing the appraisal value of real estate include value-in-use
appraisals, insurance value appraisals, investment value appraisals, liquidation value
appraisals, and market value appraisals. One true statement about these approaches is that

A. a value-in-use appraisal cannot be lower or higher than a market value appraisal for the
same property
B. an insurance value appraisal of real estate typically includes the value of the land
C. both an investment value appraisal and a liquidation value appraisal estimate the value
of the property to a particular investor
D. a market value appraisal that employs the comparables method attempts to estimate
the market value of property by reference to recent selling prices for properties with
similar characteristics
Reference: c. 9, p. 6
Real estate appraisers can use several approaches for establishing the appraised
value of real estate. An appraiser who valued a property at its highest and best
use most likely is using a (value-in-use / investment value) appraisal. (An
insurance value / A market value) appraisal does not include the value of the land.

A. value-in-use / An insurance value

B. value-in-use / A market value
C. investment value / An insurance value
D. investment value / A market value
Reference: c. 9, p. 7
Institutional investors tend to focus their expertise on a particular sector of commercial
property, such as core properties, opportunistic properties, and value-added properties. The
following statements are about these traditional classifications of commercial properties
based on risk characteristics. Select the answer choice containing the correct statement.

A. Core properties have a high-risk, high-return investment profile because they require
extensive development over an extended time period.
B. Core properties are the least liquid of all property classifications, so investors must hold
onto them for long periods.
C. Opportunistic properties include multifamily properties, office buildings, light industrial
properties, and retail properties.
D. Value-added properties, such as hotels, typically focus on the potential for both income
and capital appreciation.
Reference: c. 9, p. 7
One class of commercial real estate is the most liquid of all the classes. In
addition, these properties are the ones that institutional investors are likely to hold
for long periods of time to take advantage of the stable lease and rental cash flows
that they provide to an investment portfolio. This class of commercial real estate is
known, collectively, as

A. core properties
B. opportunistic properties
C. net lease properties
D. value-added properties
Reference: c. 9, p. 9
The Wonderland Hotel has an average occupancy rate (AOR) of 78%, an average
daily rate (ADR) for a room of $175, and 1,200 rooms. This information indicates
that Wonderland’s revenue per available room (RevPAR) is

A. $38.50
B. $136.50
C. $175.00
D. $311.50
Reference: c. 9, pp. 8-9
The Abarza Financial Group is a tenant in a Class A office building. According to
the definition of Class A buildings, one characteristic of a Class A building is that it
typically

A. has a definite market presence

B. has fair to good finishes for the area
C. has adequate systems
D. targets tenants who will pay below-average rent for the area
Reference: c. 9, p. 10
The Yuletide Hotel has an average occupancy rate (AOR) of 75 percent, an
average daily rate (ADR) of $110, and 1,000 rooms. This information indicates
that the total room revenue for the Yuletide Hotel for one year is equal to

A. $4,290,000
B. $8,250,000
C. $30,112,500
D. $40,150,000
Reference: c. 9, p. 14
Mortgages are an important investment category for institutional investors such as
life insurance companies. One true statement about mortgages is that mortgages

A. held in life insurance company portfolios are restructured mortgages

B. represent unsecured debt
C. tend to be less risky but more liquid than bonds
D. produce income that provides a predictable stream of cash flows
Reference: c. 9, p. 13-14
Institutional investors sometimes use special purpose entities (SPEs) such as joint
ventures or limited partnerships to participate in sizeable real estate investments.
Under a (joint venture / limited partnership), one or more partners manage and control
the business and are legally liable for its debts and obligations, and one or more
partners are liable only to the extent of the amount of money invested in the business.
A (joint venture / limited partnership) generally concludes at the end of the project for
which it was formed.

A. joint venture / joint venture

B. joint venture / limited partnership
C. limited partnership / joint venture
D. limited partnership / limited partnership
Reference: c. 9, p. 13-14
Two commonly used special purpose entities (SPEs) play a role in real estate investing: limited
partnerships and joint ventures. The following statement(s) can correctly be made about these SPEs as
they relate to real estate investments:

A) When used in real estate investing, a typical joint venture has an expected life of 10 years, with an
option to extend the venture for another one to five years.

B) When a limited partnership is used in real estate investing, the general partner typically provides the
funds for the purchase, while the limited partner negotiates with the property owner, closes the sale,
supervises any renovation of the property, and subsequently manages the property.

I. Both A and B
II. A only
III. B only
IV. Neither A nor B
Reference: c. 9, pp. 16-17; c. 4, p. 26
A real estate analyst for the Lyrical Life Insurance Company is evaluating the following
two commercial properties:

● The Haiku Building is worth $4.2 million and has a $3.0 million mortgage
● The Sonnet Building is worth $5.0 million and has a $2.5 million mortgage

With respect to the loan-to-value (LTV) ratio for each of these properties, it is correct to
say that

A. the LTV ratio for the Haiku Building is equal to 1.40

B. the LTV ratio for the Sonnet Building is equal to 2.00
C. Lyrical will likely find the LTV ratio for the Haiku Building to be acceptable
D. Lyrical will likely find the LTV ratio for the Sonnet Building to be acceptable
Reference: c. 9, p. 18
In addition to real estate technical services, mortgage investments also require
administrative activities, such as mortgage servicing. By definition, mortgage servicing
refers to the process of

A. creating a mortgage in a local area by offering real estate investors nonrecourse

loans of five to 20 years
B. maintaining the mortgage by collecting payments, keeping records, and sending
statements to borrowers
C. evaluating the credit risk of a potential borrower and evaluating a property’s value
in relation to the loan value
D. executing a promissory note and deed of trust in order to transfer the ownership of
the property
Reference: c. 9, p. 18
A mortgage servicing department provides mortgage services to borrowers and
monitors loan performance and compliance. For mortgages, the timely payment of
principal and interest is referred to as loan (performance / compliance). Mortgages
that fall behind schedule may be referred to a unit that resolves problem
mortgages, a process known as asset (appraisal / preservation).

A. performance / appraisal
B. performance / preservation
C. compliance / appraisal
D. compliance / preservation
Reference: c. 9, p. 18
Casper O’Hare works in mortgage servicing at the Papaya Life Insurance
Company. Mr. O’Hare specializes in identifying and monitoring loans for slow
payment and resolving problems with delinquency. This information indicates that
Mr. O’Hare most likely is

A. an asset preservation specialist

B. a mortgage correspondent
C. a loan compliance officer
D. a best efforts basis underwriter
Reference: c. 9, p. 19
In the context of mortgage performance quality, a mortgage on which the borrower
is 30 to 90 days delinquent in payment most likely would be classified as

A. a restructured mortgage
B. a mortgage in good standing
C. a mortgage in process of foreclosure
D. an overdue mortgage
Reference: c. 9, pp. 21, 23
Two primary types of residential mortgage-backed securities (MBSs) are agency MBSs and nonagency
MBSs. The following statement(s) can correctly be made about agency and nonagency MBSs:

A. Agency MBSs are based on portfolios of residential mortgages that meet the guidelines as to credit
quality, underwriting standards, and other risk factors of one of several U.S. government agencies.
B. The loans held in nonagency MBSs can represent significantly more default risk than agency MBSs
because nonagency MBSs can include subprime residential loans with negative amortization, low-
documentation loans, and alt-A loans.

A. Both A and B
B. A only
C. B only
D. Neither A nor B
Reference: c. 9, pp. 21, 23, 24
For this question, if answer choices (1) through (3) are all correct, select answer
choice (4). Otherwise, select the one correct answer choice.

With respect to agency mortgage-backed securities (MBSs) that are created by

the Government National Mortgage Association, or Ginnie Mae, it is correct to say
that these MBSs

I. are backed by the full faith and credit of the U.S. government
II. are fixed-income securities that are backed by commercial loans
III. are generally not subject to prepayment risk
IV. all of the above
Reference: c. 9, pp. 23, 24-25
Two types of structured mortgage securities are a collateralized mortgage
obligation (CMO) and a commercial mortgage-backed security (CMBS). CMBSs
are securities based on portfolios of (residential / commercial) mortgages. One
characteristic of a CMBS is that this type of security is generally (callable /
noncallable).

A. residential / callable
B. residential / noncallable
C. commercial / callable
D. commercial / noncallable
Reference: c. 9, pp. 25-26
The following statements are about real estate investment trusts (REITs). Three of the
statements are true, and one of the statements is false. Select the answer choice
containing the FALSE statement.

A. In an equity REIT, the REIT is the property owner and is responsible for managing
the property.
B. REITs pay a consistent dividend yield regardless of how the REIT shares perform.
C. Public REITs generally are closed-end funds with a specific term, usually 10 to 12
years.
D. Mortgage REITs invest in mortgages or mortgage-backed securities, and earn
income from mortgage loan interest.
Reference: c. 9, pp. 25-26
The following statements are about real estate investment trusts, or REITs. Three
of the statements are true, and one of the statements is false. Select the answer
choice containing the FALSE statement.

A. One type of REIT, the equity REIT, is a potential hedge against inflation.
B. The vast majority of REITs are publicly traded on major stock exchanges.
C. A REIT combines capital from many investors and invests in a pool of real
estate.
D. Private REITs generally are closed-end funds with a specific term, usually 10
to 12 years.
Reference: c. 9, pp. 26-27
Several important market indexes reflect market returns on investment properties held
by institutional investors. The NCREIF Property Index (NPI) is based on a total-rate-of-
return measure of investment performance of a very large pool of individual
commercial real estate (properties / loans) acquired in the private market for
investment purposes only. For commercial real estate whole loans, the (LifeComps
Index / FTSE NAREIT US Index) captures both loan performance and the underlying
real estate collateral performance.

A. properties / LifeComps Index

B. properties / FTSE NAREIT US Index
C. loans / LifeComps Index
D. loans / FTSE NAREIT US Index