CAP rates measure A. Returns f
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CAP rates measure
A. Returns from both the yearly cash flows of a property and thesale of property
B. The NOI of multiple years of a property
C. One year of NOI relative to the sales price
D. The NOI and before tax equity reversion of a property relativeto the sale price
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The valuation approach most commonly used for insurance purposesis the
A. Cost approach
B. DCF approach
C. Direct Capitalization
D. Sales Comparison
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Which of the following is correct about the Capital Stack?
A. The Common Equity holder is more protected than the PreferredEquity holder
B. Senior Debt is in the #2 position in terms of priority
C. Mezzanine investor carries more risk than Senior Debt
D. All equity investors always have decision power
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Which statement is true about residential real estatecycles?
A. Generally speaking, when real estate values start going down,rents start going up.
B. Subleasing determines the volatility of the real estatecycle
C. Real Estate cycles are predictable
D. They show that it is practically always a landlord’s market
Answer:
1) Cap rate = NOI (net operating income) / sales price, whereNOI is for one year. Hence option C is the correct answer.
2) Valuation approach most commonly used for insurance purposesis cost approach. Sales comparison can be used only when recentsales of comparable properties are available. DCF approach can onlybe used for properties that are generating rents and there issufficient data on market trends. Direct capitalization requiresuse of a cap rate which is typically based on market comparables /trends.
3) Common equity holder is junior to preferred equity in thecapital stack and hence has less protection. Senior debt has #1priority in the capital stack. Mezzanine investor is junior tosenior debt and thus carries more risk (Option c is correct).
4) As rents go down, typically NOI and hence property valuationgoes down. Real estate cycles, as with other market cycles, are notpredictable. In a downturn, people are unlikely to buy new homesand will hence increasingly look to rent. On the other hand, whenhome prices are rising they may soon become unaffordable and hencepeople will be forced to rent.
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