Final Exam exam 11 April, answers PDF

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C307 - Real Estate Investment Sample Exam Answers HA 278 Tsur Somerville [email protected] 822-8343 1. Cap rates a. This lowers banks borrowing costs, and the general level of interest rates. As a spread over lending rates, cap rates are thus likely to fall. At a micro level, with lower costs of debt,...

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C307%-%Real%Estate%Investment% Sample%Exam%Answers% % ! HA!278! ! ! ! ! ! ! ! ! ! Tsur!Somerville! [email protected]! ! ! ! ! ! ! ! 822-8343! ! 1. Cap%rates% ! a. This!lowers!banks!borrowing!costs,!and!the!general!level!of!interest!rates.!!As! a!spread!over!lending!rates,!cap!rates!are!thus!likely!to!fall.!!At!a!micro!level,! with!lower!costs!of!debt,!buyers!can!bid!more!for!properties!and!keep!the! same!return!on!equity.!!! b. Lowers!real!estate!risk,!so!real!estate!cap!rates!will!be!lower! c. No!affect,!since!this!is!in!rents,!unless!we!think!it!increases!redevelopment! potential!or!lowers!risk! d. Increases!redevelopment!potential,!raising!the!value!of!a!site!relative!to! current!use,!this!lowers!cap!rates!on!average,!but!NOT!for!those!assets! already!developed!to!the!optimal!density!! ! ! 2. Hedonic%%%% ! Price!($)=!12000!+!260floorarea(square+feet)++25000!#bath+room+++2500!age+(#+years+since+ constructed)++98000dummy2005++125000dummy2006++!78000dummy2007! ! a. V2007!=!12000!+!260*2400!+!25000*4!!+!2500*(2007-1998)!+!78000!=!! 836,500! ! b. Statistical!vs!comparables! ! i. Statistical!includes!all!market!information,!not!just!a!small!set!of! comparables! ii. It!can!explicitly!capture!the!effect!of!specific!variables! iii. It!is!subject!to!specification!error! iv. It!is!subject!to!left!out!variable!bias! ! ! ! c. Coefficient!in!equation!2!is!more!reasonable!because!value!is!falling!with! building!age.!(it!could!rise!for!older!heritage!buildings)! ! d. Left!out!variable!bias.!!!Higher!priced!neighbourhoods!had!older!units,! including!the!dummies!controlled!for!this!neighbourhood!effect!and!allows! the!age!variable!to!reflect!a!pure!building!age!effect.!

! e. Dunbar!and!Kitsilano!(60000-90000);!controlling!for!the!included! characteristics,!Dunbar!is!on!average!30,000!lower.!!Cambie!and!Point!Grey! (0!–!100000);!controlling!for!the!included!characteristics,!Cambie!is!on! average!100,000!lower.!!! ! ! ! ! 3. Assessments!vs.!automated!valuations!! a. Assessment!vs!Automated! i.

Assessment! 1. Tax!payers!care!about!the!precise!estimate!since!it!determines! how!much!they!pay!in!taxes!! 2. Statistical!appraisal!will!result!in!some!estimates!being!higher! than!they!might!actually!sell!for!(hedonic!coefficients!are!the! mean!effect)!!

ii.

Automated!valuation! 1. These!valuations!can!be!very!inexpensive!(low!marginal!cost)!! 2. Banks!don’t!care!about!the!precise!value,!just!that!there!is! enough!value!to!cover!the!amount!they!lent!!

! b. Appraised!value!different!from!sales!! i.

Appraisal!goal! 1. Appraisal’s!goal!is!a!likely!market!price!! 2. Actual!price!may!vary!depending!on!borrower!and!! a. Different!market!knowledge! b. Different!motivation!to!sell!

ii.

Statistical!valuation!! 1. uses!all!sales!and!may!not!put!enough!weight!on!those!sales! that!have!the!most!information!because!they!are!such!good! match! 1

C307 Real Estate Investment Final Exam

2. Functional!form!error! 3. Left!out!variable!bias! 4. Unit!is!far!away!from!mean!characteristics! ! c. Where!to!use!! i.

Toronto!condominiums! 1. Good!choice!of!system!! 2. Lots!of!transactions!! 3. Properties!are!similar!and!easier!to!model!!

! ii.

Rural!properties! 1. Bad!choice!of!system!! 2. few!transactions!! 3. Properties!are!unusual!and!hard!to!model!! !

4. Rents!and!Asset!values! ! a. 150,000!*!1.15!=!172,500.!($21.56!psf)! ! b. 173,700!*!1.10!=!191,100.!!($23.89!psf)! ! c. Fully!occupied!vs!stabilized!! i.

Lower!!

ii.

Because!of!the!possibility!of!leasing!up!vacant!space!and!growing! NOI!

! d. Expected!sales!price!! i.

Rent!Revenues!(fully!occupied)!

ii.

Add!Recoverable!expenses!(fully!occupied)!

iii.

Subtract!Vacancy!loss!(reduce!revenues!by!stabilized!vacanc!

C307 Real Estate Investment Final Exam

2

iv.

Subtract!Expenses!!

v.

Stabilized!NOI!!

vi.

Cap!it!!

5. REIT!Metrics! ! ! ! a. Property!NAV!! i.

Gross!effective!Income!!

ii.

Gross!potential!rent!

iii.

Expense!recoveries!

iv.

Gross!potential!income!

v.

Deduct!vacancy/credit!loss!

vi.

Operating!expenses!

vii.

NOI!

viii.

Value!=!NOI/cap!!

ix.

Minus!debt!

x.

Property!NAV!(total!REIT!debt,!not!just!mortgages)!! !

b. REIT!Valuation! i.

GAAP!

ii.

Minus!assets/sales!

iii.

Plus!interest!

iv.

Plus!depreciation!

v.

Apply!multiplier!! !

c. Discount!vs!Premium!! ! ! 3 C307 Real Estate Investment Final Exam...