Final Review Questions

1. Which of the following statements is most correct?

a) Yield Degradation is the reduction in the IRR (yield to maturity) below the
contract rate, based on a specified conditional recovery rate.
b) Realized yield is the shortfalls to the lender as a result of default and
foreclosure.
c) Credit loss is the difference between the realized yield and yield
degradation.
d) Realized yield equal to contract yield plus yield degradation.

2. Which of the following statement is incorrect?

a) Yield degradation is conditional based on that default will occur in a
particular year.
b) Yield degradation is conditional based on a specific recovery rate.
c) The conditional yield degradation is greater, the earlier the default occurs
in the life of the loan.
d) The conditional yield degradation is greater, the later the default occurs in
the life of the loan.

3. What is the main factor which can cause the Weighted Average Maturity of
tranch A of a CMBS issue to be lower (shorter) than tranche B?
a) Superior credit quality
b) Prepayment of loans
c) More “weight” attributed to higher quality financial issues
d) Less demand from non-institutional investors

4. Which of the following statement is mostly incorrect?

a) A mortgage pool consisting of loans that have relatively low and
homogeneous LTV ratio will not need as much credit support for a given
credit rating.
b) All other thing equal, a mortgage pool containing loans with diverse LTV
ratio can have higher credit rating than a mortgage pool containing loans
with homogeneous LTV ratio.
c) Greater credit support will result in a higher rating for a given tranche.
d) It is the job of the bond rating agency to evaluate how much credit support
is required for a given credit rating for each tranche in a CMBS issue.

5. What is meant by the term "umbrella partnership REIT" (or "UPREIT")?

a) A REIT that invests primarily in Seattle.

b) A REIT that invests in low-risk properties, saving for a "rainy day".
c) A REIT that owns property equity directly.
 d) A REIT that owns property only indirectly, through its holdings in a
partnership.

6. Suppose REIT prices have risen strongly for two consecutive years. It is
reasonable to expect:

a) REIT prices will certainly rise substantially next year.

b) REIT prices will certainly fall substantially next year.
c) Property market prices will probably rise in the upcoming year.
d) Property market prices will probably fall in the upcoming year

7. An "Expense Stop" provision in a lease:

a) Puts a limit on the amount of building operating expenses the tenant must
pay.
b) Puts a limit on the amount of building operating expenses the landlord must
pay.
c) Puts a limit on the amount of building operating expenses the property
manager must pay.
d) Puts a limit on the total operating expenses of a building.

8. All of the following relate most directly to the benefit side of the real estate
development NPV equation, except:
a) The construction and absorption budget.
b) The operating budget.
c) The projected cap rates in the built property market.
d) The rents in the built property market.

9. Suppose a lease has a 75% CPI-Adjustment each year. If last year's rent
was $20/SF and the CPI has increased from 155 to 161, what is the new rent
this year?
a) $20.50
b) $20.58
c) $20.77
d) $21.00

10. A "Step-up" provision in a commercial property lease means:

a) Provides for the tenant to move to a higher floor.
b) Adjusts the rental payments to changes in inflation.
c) Specifies in advance the absolute dollar amounts by which the rental
payments will increase, no matter what happens to inflation.
d) Requires the tenant to pay specified increases in the building's operating
expenses.