honeycfa

A portfolio manager is considering the purchase of an office building. He has identified the major characteristics of a property that affect value, and has assigned a quantitative rating to each one, based upon recent comparable sales in the area. Using a regression model, he has developed benchmark values for each characteristic, which he will use to estimate the market value of the potential investment. This method of estimating property value is best described as the:

A) sales comparison approach.

B) hedonic price estimation.

C) regression price model.

---

The sales comparison approach uses recent transactions to estimate a benchmark value. The regression price model is a fictitious model. The hedonic price model is a variation of the sales comparison approach, but is a more formalized, structured approach.

honeycfa

The data below pertains to an office building’s next reporting period:

• Gross rental income = $6.5 million.
• Operating expense = $2.3 million.
• Financing expense = $900,000.
• Depreciation expense = $750,000.
• Vacancy rate = 8.5%.

The market expects a return of 12.3%. The value of the office building is closest to:

A) $16.24 million.

B) $22.33 million.

C) $29.65 million.

---

Net operating income (NOI) = gross rental income × (1 ? vacancy rate) ? operating expenses
NOI = $6.5 million × (91.5%) ? $2.3 million
NOI = $3.6475 million
Value = NOI / market cap rate
Value = $3.6475 million / 12.3%
Value = $29.6545 million

honeycfa

A real estate agent contacts an investor regarding a property that has recently come on the market. The real estate agent can provide reliable information regarding the property’s net operating income, as well as the prevailing market cap rate, based on recent comparable sales. The investor can best estimate the market value of the property, with the information supplied by the real estate agent, using the:

A) discounted cash flow model.

B) income approach.

C) sales comparison approach.

---

The sales comparison approach uses recent transactions to estimate a benchmark value. The discounted cash flow model is used as a check on investment valuation. The income approach uses a property’s NOI, divided by the market cap rate, to estimate market value.

honeycfa

An investor with a large real estate portfolio must estimate the value of his holdings at year-end. Given the following data for an apartment building in the portfolio, estimate the appraised value using the income approach:

NOI	$165,000
Marginal tax rate	28%
Market cap rate	9%

A) $1,833,333.

B) Need additional information to calculate.

C) $1,319,999.

---

Appraisal price = NOI / Market cap rate = $165,000 / 0.09 = $1,833,333. Remember that all calculations for the income approach are made pre-tax.

honeycfa

John Williams wants to purchase an apartment complex. The complex consists of 75 units each renting for $700 per month. The estimated vacancy and collection loss rate is 7%. The insurance for the building is $40,000 annually and taxes are $22,000 annually. Utilities are $18,000 and the maintenance expense is $29,000.

Assume a market cap rate of 11%. Recent sales of nearby apartment complexes have resulted in the following information.

Characteristics	Units	Slope Coefficient in $ per Unit
Proximity to downtown	Miles	-350,000
Vacancy rate	Percent	-500
Building size	Units	+75,000

Williams' proposed apartment complex is 4 miles away from downtown and has an estimated vacancy rate of 6%.

What is the net operating income (NOI) for Williams' proposed apartment complex?

A) $498,900.

B) $436,153.

C) $476,900.

---

NOI = (75)(700)(12)(0.93) – $40,000 ? $22,000 ? $18,000 ? $29,000 = $476,900.

---

Using the sales comparison approach, the value of the apartment complex is:

A) $4,060,000.

B) $4,222,000.

C) $3,894,500.

---

Value = (-350,000)(4) + (-500)(6) + (75,000)(75) = 4,222,000

---

Using the income approach, the value of Williams' apartment complex is:

A) $4,525,455.

B) $5,727,273.

C) $4,335,455.

---

Appraisal price = NOI / market cap rate = $476,900 / 0.11 = $4,335,454.55

honeycfa

A property has a gross potential rental income of $740,000. Operating expenses, excluding insurance and property taxes, amount to 30% of gross rents. Insurance and property taxes total $16,800. If the market capitalization rate is 22%, the value of this property is closest to:

A) $2,278,000.

B) $1,727,000.

C) $2,431,000.

---

Appraised Price = NOI / CAP = [(0.7 × 740,000) ? 16,800] / 0.22 = 2,278,182

honeycfa

A real estate analysis estimates the market value of an income-producing property at $2,560,000. The annual gross potential rental income is $596,000, the annual property operating expenses and taxes are $178,800, and the annual vacancy and collection losses are $89,400. What capitalization rate was used by the analysis to assess the property at $2,560,000?

A) 0.1280.

B) 0.1275.

C) 0.1290.

---

MV	=	NOI
		CAP
CAP	=	NOI
		MV

596,000 ? 178,800 ? 89,400	=	0.128
2,560,000

honeycfa

An investor made the following purchase:

• Bought an office building for $500,000 using 90% financing.
• The borrowing cost was 10%.
• They received $29,000 at year-end from rentals.
• They sold the building for $520,000 at the end of the year.

Assuming a flat tax rate on income and capital gains of 25% what was the return on equity?

A) +6%.

B) -3%.

C) +10%.

---

Equity = 500,000(0.10) = 50,000

Interest cost = 450,000 (0.10) = 45,000

Capital Gain = 520,000 - 500,000 = 20,000

ATCF = (Income + Capital Gain - Interest)(1 - tax rate)

ATCF = (29,000 + 20,000 - 45,000)(1 - 0.25) = $3,000

ROE = ATCF / Equity = 3,000 / 50,000 = 0.06 or 6%

honeycfa

Ron Biggs is considering a real estate investment. In the first year, the property is expected to generate revenue of $65,000. The expense in the first year is $25,000 and the depreciation allowance will be 2.6 percent of the $350,000 initial investment. Assuming all cash flows occur at the end of the year and Biggs expects to be in a 35 percent marginal tax bracket, the after-tax cash flow in year 1 is closest to:

A) $30,900.

B) $29,185.

C) $20,085.

---

After-tax cash flow = (revenue – cost – depreciation)(1 – t) + depreciation.
Depreciation = 0.026 × $350,000 = $9,100.
CF = ($65,000 – $25,000 – $9,100)(1 – 0.35) + $9,100 = $29,185.

honeycfa

A real estate speculator is considering an investment in a piece of raw land that will be developed. He expects to invest $150,000 in the land. It will not be developed for three years, but at the end of year 3, he expects a cash flow of $25,000. In years 4 and 5, the cash flow will increase to $35,000, and at the end of year 5 he expects to sell the land for $185,000. Due to the risky nature of the investment, he requires an 18% return.

The net present value of this investment is closest to:

A) -$20,568.

B) -$32,903.

C) $30,222.

---

CF₀ = –150,000
CF₁ = 0
CF₂ = 0
CF₃ = 25,000
CF₄ = 35,000
CF₅ = (35,000 + 185,000) = 220,000
I/Y = 18; CPT → NPV = –$20,567.90

---

The internal rate of return (IRR) is closest to:

A) 12.6%.

B) 14.3%.

C) 18.1%.

---

CF₀ = –150,000
CF₁ = 0
CF₂ = 0
CF₃ = 25,000
CF₄ = 35,000
CF₅ = 220,000
CPT → IRR = 14.3%.