UNIVERSITY OF CALIFORNIAFinal Examination
Haas School of BusinessWednesday, December 8, 1999, 6:00 p.m.
B.A. E-280 -- Real Estate and Urban Land Economics
Dr. Edelstein
General Instructions:
1.Answer each part of the examination in a separate bluebook; Answer all three parts of the examination (Parts I, II and III).
2.You will be given two hours and fifteen minutes to answer all parts; you may allocate your time as you wish.
3.Follow directions for each part carefully.
4.All parts count equally for grading purposes.
5.Computational devices, laptop computers, calculators, slide rules, annuity tables, etc., are permissible aids; no textbooks, physical notes, computer file notes, computer-calculator manuals or any other specifically non-authorized aids are permitted for student use during the exam.
Part I
(60 POINTS)
For TWO of the following THREE statements, define, evaluate, analyze, and explain each statement. (30 points maximum for each response):
a)Slums are caused by insufficient housing production; and, therefore, appropriate public policy should focus on the encouraging of new production.
b)The duration of a real estate investment is relatively unaffected by its property leases.
c)The value of commercial real estate assets and construction levels increase during periods of rising expected inflation.
Part II
(60 POINTS)
Define, analyze, explain, compare, contrast and evaluate FOUR of the following SIX pairs of phrases or terms (15 points maximum for each response):
a)Residual User Hypothesis -- Counter-Cyclical Residential Construction Activity
b)Value of a P-O Bond – Rising Interest Rates Scenarios
c)The Real Estate Asset Class and REITs -- Optimal Portfolio Diversification
d)Prepayment “Speeds” for Mortgage Pools – Declining Interest Rate Scenarios
e)AITD (Wrap Loans) NIE – Rate of Return to Investor (Wrap Lender)
f)FFO and FAD – REIT Valuation
Part III
(60 POINTS)
Answer all sections of the following question - problem:
You are considering investing in a motel on Park Place (i.e., very close to Boardwalk), with a purchase price of $24,000, all cash (i.e., no debt financing). The project has a four year life, at which time the land reverts back to the original land owner (i.e., the motel is on leased land, and the reversion value for the parcel at the end of four years to you would be zero). Assume you can depreciate 100% of your investment straight-line over four years, and you are in the 50% tax rate bracket.
a) If there is no expected inflation, and you expect the BTCF to be constant at $10,000 per year,
determine the real after tax IRR for the project. Explain fully. (15)
b) If the BTCF grows at 7% per annum, then the following would occur:
Year 1Year 2Year 3Year 4
BTCF10,70011,44912,25013,108
Assume general inflation, also, grows at 7% per annum, and assume all other conditions described in part (a) above remain unchanged. Calculate the real after tax IRR for the project. Explain fully any differences in your answer from part (a) above. (15)
c) In general terms, explain how your answer to part (b) might change if the real estate were purchased
using fixed rate debt financing from the St. Charles Place Bank. (10)
d) If the Federal Excise Tax Act of 1999 were passed such that annual depreciation were adjusted by
the rate of inflation (7%), (i.e., depreciation were to be indexed to inflation), and assuming all the
other conditions in part (b) still were true, calculate under the “Federal Excise Tax Act of 1999” the
real after tax IRR. Contrast and analyze how this answer differs from parts (a) and (b) above (i.e.,
Does the investment “Pass Go”?). Explain fully. (20)
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UNIVERSITY OF CALIFORNIAFinal Examination
Haas School of BusinessSaturday, December 11, 1999, 8:00 a.m.
B.A. 280 -- Real Estate and Urban Land Economics
Dr. Edelstein
General Instructions:
a)Answer each part of the examination in a separate bluebook; Answer all three parts of the examination (Parts I, II and III).
b)You will be given two hours and fifteen minutes to answer all parts; you may allocate your time as you wish.
c)Follow directions for each part carefully.
d)All parts count equally for grading purposes.
e)Computational devices, laptop computers, calculators, slide rules, annuity tables, etc., are permissible aids; no textbooks, physical notes, computer file notes, computer-calculator manuals or any other specifically non-authorized aids are permitted for student use during the exam.
Part I
(60 POINTS)
For TWO of the following THREE statements, define, evaluate, analyze, and explain each statement. (30 points maximum for each response):
a)Slums are caused by insufficient housing production; and, therefore, appropriate public policy should focus on the encouraging of new production.
b)The duration of a real estate investment is relatively unaffected by its property leases.
c)The value of commercial real estate assets and construction levels increase during periods of rising expected inflation.
Part II
(60 POINTS)
Define, analyze, explain, compare, contrast and evaluate FOUR of the following SIX pairs of phrases or terms (15 points maximum for each response):
a)Residual User Hypothesis -- Counter-Cyclical Residential Construction Activity
b)Value of a P-O Bond – Rising Interest Rates Scenarios
c)The Real Estate Asset Class and REITs -- Optimal Portfolio Diversification
d)Prepayment “Speeds” for Mortgage Pools – Declining Interest Rate Scenarios
e)AITD (Wrap Loans) NIE – Rate of Return to Investor (Wrap Lender)
f)FFO and FAD – REIT Valuation
Part III
(60 POINTS)
Answer all sections of the following question - problem:
You are considering investing in a motel on Park Place (i.e., very close to Boardwalk), with a purchase price of $24,000, all cash (i.e., no debt financing). The project has a four year life, at which time the land reverts back to the original land owner (i.e., the motel is on leased land, and the reversion value for the parcel at the end of four years to you would be zero). Assume you can depreciate 100% of your investment straight-line over four years, and you are in the 50% tax rate bracket.
a) If there is no expected inflation, and you expect the BTCF to be constant at $10,000 per year,
determine the real after tax IRR for the project. Explain fully. (15)
b) If the BTCF grows at 7% per annum, then the following would occur:
Year 1Year 2Year 3Year 4
BTCF10,70011,44912,25013,108
Assume general inflation, also, grows at 7% per annum, and assume all other conditions described in part (a) above remain unchanged. Calculate the real after tax IRR for the project. Explain fully any differences in your answer from part (a) above. (15)
c) In general terms, explain how your answer to part (b) might change if the real estate were purchased
using fixed rate debt financing from the St. Charles Place Bank. (10)
d) If the Federal Excise Tax Act of 1999 were passed such that annual depreciation were adjusted by
the rate of inflation (7%), (i.e., depreciation were to be indexed to inflation), and assuming all the
other conditions in part (b) still were true, calculate under the “Federal Excise Tax Act of 1999” the
real after tax IRR. Contrast and analyze how this answer differs from parts (a) and (b) above (i.e.,
Does the investment “Pass Go”?). Explain fully. (20)
1