FIN 3710 - City University of New York



RES9776 Department of Real Estate

Real Estate Finance Baruch College

Spring 2011

|RES 9776 |

|Final (Practice) Exam 05/12/11 |

Name : _______________________________________

Please print

Signature : _______________________________________

1. The exam is closed book and closed notes. You can bring in one page, double-sided, 8(11 formula sheet.

2. You can (and probably have to) use a calculator.

3. You have a total of 120 minutes for the exam.

4. The whole exam has a total of 30 points. It will count 30% for your final course grade. There are total of 5 multiple choices questions (2 points each) and five short essay questions (4 points each).

5. Do not separate the exam book. Turn in the entire exam at the end.

6. Budgeting your time efficiently.

7. Good luck.

1. The market rate for a fully-amortizing 30 year constant payment fixed rate mortgage is 6.5% for 80% LTV. A developer offers a mortgage that is 0.5% below the market. If the developer is expecting the average buy to stay for 7 years, what is the equivalent size of dollar markdown for a $500,000 house ($400,000 mortgage)?

|A. | < $ 8,000 |

|B. | $8,000 – $ 9,000 |

|C. | $9,000 – $10,000 |

|D. | > $10,000 |

Questions 2-5 are based on the following information for a 1/1 adjustable rate mortgage (ARM):

i. Loan amount is $500,000;

ii. Loan term is 30 years, while the borrower is only expected to stay for 5 years;

iii. Introduction rate is 5.0% for the first year only;

iv. Index is one year treasury;

v. Payment adjusted annually;

vi. Margin is a constant 2.5%;

vii Discount points 2%;

viii. Expected end of year (EOY) index numbers are: EOY1=5%; EOY2=6%; EOY3=7%; EOY4=8% (note end of year number is used to set ARM interest rate for the following year)

2. If the loan has a payment cap of 7.5% (no limits on amount of negative equity), what is the monthly loan payment in the second year if one only pays the minimum?

|A. | < $2000 |

|B. |$2000 - $2500 |

|C. |$2500 - $3000 |

|D. | > $3000 |

3. If the loan has a payment cap of 7.5% (no limits on amount of negative equity), what is the loan balance by the end of the second year if one only pays the minimum?

|A. | < $450K |

|B. | $450K - $4750K |

|C. |$475K - $500K |

|D. | > $500K |

4. If the loan has no payment cap, yet a 2% annual and 5% lifetime interest cap, what is the loan payment in the second year if one only pays the minimum?

|A. | < $2000 |

|B. |$2000 - $2500 |

|C. |$2500 - $3000 |

|D. | > $3000 |

5. If the loan has no payment cap, yet a 2% annual and 5% lifetime interest cap, what is the loan balance by the end of the second year if one only pays the minimum?

|A. | < $450K |

|B. | $450K - $475K |

|C. |$475K - $500K |

|D. | > $500K |

6. Expenses for a 1,000 square foot office space are $6.00 per square foot. The lease specifies an expense stop of $5.40. What is the total expense paid by the landlord?

A. $5,400

B. $6,000

C. $600

D. $0

7. A 1,000 square foot office space is leased at $15.00/square foot during the first year with $2.00 step-up provisions each of the following years. The lease is gross with an expense stop set at $6.65/square foot, and yearly expenses/square foot are as follows: $6.00, $6.65, and $7.05. The lease provides for two months of free rent at the end of the lease term. If the lease term is three years and the discount rate is 10%, what is the effective rent/square foot?

A. $9.38

B. $9.50

C. $10.22

D. $10.46

8. What is does an expense stop do in a lease?

A. Stops expenses from increasing

B. Expenses above the stop are paid by the owner

C. Expenses above the stop are paid by the tenant

D. Expenses below the stop are paid for by the tenant

9. Which does the term “in-line tenants” refer to?

A. Smaller stores in a mall that are not anchor tenants

B. Tenants who’s sales are inline with estimates

C. Tenants who pay their rents on a timely basis

D. Stores that are located inside the mall including anchors

Q6-Q9 ABCA

10. What is the APR for the following 30-year 3/1 ARM mortgage (4 points)?

i. Intro rate of 5.0%;

ii. 3% of loan balance for fees and discount points;

iii. Market index was 2.5% at closing, but expects to go up to 5% in one year, 6% in two years, and 7% in three years;

iv. Margin of 2.5%;

v. Lifetime interest cap of 6.0 %, and annual interest cap of 2.0%.

1. You are interested in a reversed annuity mortgage with the following feature:

Initial advancement of $100,000 immediately;

Annual payment of $10,000 at the end of the year;

Loan term of 10 years;

Fixed interest rate of 9%.

Your house current is worth $300,000.

At what price 10 years from today will it become optimal for you to walk away from your house and default on the mortgage (4 pts)?

12. You are considering the following graduate payment mortgage:

i. fixed interest rate of 12%;

ii. two adjustments of payment after 3rd year and 6th year (there will be 3 levels of payments);

iii. at each adjustment the monthly payment will go up by 30%;

iv. 30 year loan term and fully amortizing (balance will be zero after 360 months).

What is the monthly payment in the first month if you want to borrow $200,000 (4 pts)?

• 13. You are interested in an apartment in Manhattan.

• The owner offers options for you either to rent or buy the place.

• i. You can rent for $2,000 a month.

• ii. You can purchase at $ 400,000;

iii. If purchase, you plan to use a one-year interest only mortgage with 6% nominal interest rate a year. The expected rate of inflation is 3%, which implies a real rate of interest of (approximately) 3 %;

iv. If you own the place, you need to spend 3% a year for maintenance to keep the quality of the property constant (i.e. zero depreciation);

• v. If you own the place, you need to pay property tax of $6,000 a year;

vi. The unit (per square feet) price of the property is expected to stay flat in real term over your expected stay;

• vii. You are in the 20% tax bracket.

viii. You are willing to pay 1% more per year to own instead of renting to accommodate your gardening habits.

• a. What is your preferred form of house tenure (2 pts)?

• b. Will your decision change if you only plan to stay there for 2 years, and it will cost 5% of property value as brokerage fees to sell the property (2 pts)?

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