Question

Part II: True/False (2% each)

1. T                F                Negative amortization reduces the principal balance of the loan.

2. T                F                ARMs help lenders limit or eliminate interest rate risk.

3. T                F                The default risk of a fixed rate mortgage is higher than the default risk of an ARM.

4. T                F                The term “percentage rent” refers to rent paid by the tenant as a percentage of the space leased to reimburse the landlord for increases in operating expenses.

5. T                F                   A gross lease is one in which tenants pay all expenses.

6. T                F                   In office leasing, the difference between “usable space” and “rentable space” is the loss factor.

7. T                F                The use of a CPI index in a lease shifts inflation risk to the tenant.

8. T                F                An advantage to a lender of an Adjustable Rate Mortgage is that it is always close to par value.

9. T                F                One of the positive features of commercial real estate as an investment class is its liquidity.

10. T                F                Cycles in commercial real estate are generally deeper and longer that economic cycles.

Part III: Short answer (5% each)

1. What would be an example of an index used in Adjustable Rate Mortgages (ARMs)?
   
   ______________________________________________________________________

1. Most ARMs have rate caps and/or debt service caps. What’s the difference between a rate cap and a debt service cap? ________________________________________________________
   
   ______________________________________________________________________________
   
   ______________________________________________________________________________

2. Very briefly (please), what is the role in the single-family sector of the GSEs?
   
   _____________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

3. Name three cash expenditures incurred by a property owner that are not included in a calculation of Net Operating Income (NOI).

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________                                      

Part IV: Effective rent calculation (15%)

Using a discount rate of 8%, compute the effective rent (per square foot) of a ten-year net lease. The lease provides for a net rent of $12/sf in the first year, increasing by $1/sf each year thereafter. The lease contains a front-end six-month concession. In the sixth year of the lease, the landlord will paint the tenant’s space, equal in value to $3/sf. To assist you, you are being provided a grid:

Year	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Cash Flow

2% Bonus: Yield on 10-year treasury bonds as of close of business today within 3 basis points. Give your answer to two decimal places (example: 4.05%) _________________________.

Answer 1

Question

Negative amortization reduces the principal balance of the loan.

Answer : False

Question

ARMs help lenders limit or eliminate interest rate risk.

Answer : True

Question

The default risk of a fixed rate mortgage is higher than the default risk of an ARM.

Answer : False

Question

The term “percentage rent” refers to rent paid by the tenant as a percentage of the space leased to reimburse the landlord for increases in operating expenses.

False

Please note i have answered four sunprats of question as per policy. Thanks.