Real Estate Finance And Investments

13th Edition Brueggeman Test Bank

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 ch10
Student: ___________________________________________________________________________

1. Which of the following factors is NOT part of the definition of market value?

A. Payment is made in terms of cash in U.S. dollars or a comparable financial arrangement

B. The property has been on the open market for less than a year
C. Buyer and seller are typically motivated
D. Price is not affected by special or creative financing

2. What does an appraisal tell about the value of a property?

A. An appraisal calculates value

B. An appraisal confirms value
C. An appraisal estimates value
D. An appraisal determines value

3. Which of the following steps normally would be used in the cost approach to value?

A. Estimate net operating income of the property

B. Multiply accrued depreciation by the assessed cost
C. Add actual construction costs to the land value
D. Subtract accrued depreciation from the replacement cost

4. Which of the following choices represents the main categories of depreciation?

A. Physical, external, functional

B. Physical, economic, locational
C. External, structural, financial
D. Economic, physical, external

5. A comparable property has a feature that is superior to the subject property. What adjustment
would be made in the sales comparison approach to value?

A. Value of the feature would be subtracted from the sales price of the comparable property
B. Value of the feature would be added to the sales price of the comparable property
C. Value of the feature would be subtracted from the value of the subject property
D. Value of the feature would be added to the value of the subject property
6. Given the following sales adjustment grid, what adjustment would be made for size?

A. $20 psf.
B. $40 psf.
C. $50 psf.
D. $35 psf.

7. Which of the following expenses would NOT be included in an operating statement used to
calculated net operating income in the income approach to value?

A. Reserves for replacement

B. Maintenance
C. Real estate taxes
D. Capital additions

8. A property is sold for $200,000. Typical financing terms are an 85% loan with a 10% interest rate
over 15 years. If the before-tax cash flow is $2,000, what is the overall capitalization rate?

A. 10.96%
B. 11.96%
C. 19.13%
D. 9.96%

9. A property produces a first-year net operating income of $24,000. Because of the long economic
life of the building, the income is considered as a perpetuity that will grow by 2.5% per year. Using
a discount rate of 9.5%, estimate that property value.

A. $276,968
B. $252,632
C. $200,000
D. $342,857
10. A property is leased for $24,000 per year although market rents are currently $27,500 per year
and are expected to increase by 2% per year. The property is expected to be sold at the end of
year 10 based on a 10% terminal cap rate applied to the eleventh year NOI. The current lease on
the property will expire at the end of year 10 so the property can be leased in the eleventh year at
market rates. What is the value of the leased fee estate based on an 11.5% discount rate?

A. $362,489
B. $298,325
C. $251,298
D. $271,486

11. The discount rate is a rate that a typical investor would normally require as a(n) __________
return over investment holding period.

A. Maximum
B. Risk free
C. Expected
D. Historical

12. Total possible income less any vacancy is __________.

A. EGI
B. PGI
C. NOI
D. GIM

13. Which of the following is true concerning capitalization rates?

A. It is an IRR.
B. It explicitly considers projected future income and changes in property value over time
C. It expresses relationships between income and property value at a specific point in time
D. It is the rate of return that investors expect to earn on all capital invested

14. Capitalization rates will differ from yield rates when the income is expected to __________ over
time.

A. Stay the same

B. Increase
C. Decrease
D. Both B and C. Capitalization rates equal yield rates only when income doesn't change
15. Which is not normally considered when conducting an appraisal using the cost approach?

A. Functional obsolescence
B. Effective age
C. Capitalization rate
D. Replacement cost

16. Which lease has the lowest effective rent?

A. A Above.
B. B Above.
C. C Above.
D. D Above.

17. When conducting an appraisal, only one of three approaches should be selected to determine the
property value.

True False

18. In the cost approach to value, land value can be estimated by comparing sales of vacant land that
are similar to the subject land.

True False

19. Economic obsolescence is the loss of value caused by inefficient layout of technological
changes.

True False

20. A building has 12 foot ceilings that cause the electric bill to be $1,200 higher per year.
Depreciation caused by the ceilings can be estimated by calculating the present value of the
$1,200 per year over the remaining economic life of building.

True False

21. A gross income multiplier can be calculated by dividing the gross income by the sales price.

True False
22. An overall capitalization rate can be calculated by dividing the net operating income by the
property value.

True False

23. The capitalization rate is equal to the discount rate minus any expected annual growth in income
and property value.

True False

24. A property is purchased for $350,000. Based on an annual growth rate of 3%, the resale value at
the end of year 10 would be $456,671.

True False

25. The capitalization rate for a leased fee estate should always be lower than the capitalization rate
for a fee simple estate.

True False

26. The equity value can be estimated by subtracting debt service from net operating income and
dividing this amount by the equity dividend rate.

True False

27. The market method or direct sales comparison method of estimating site value is not the most
reliable method available.

True False

28. Appraisers use bracketing in order to estimate the upper and lower range of value.

True False

29. Return on investment and change in net operating income are essential factors for cost analysis.

True False

30. Capitalization rate of newly constructed apartment building will be more than that of relatively old
apartment building, which is comparable in all other aspects.

True False
 ch10 Key

1. Which of the following factors is NOT part of the definition of market value?

A. Payment is made in terms of cash in U.S. dollars or a comparable financial arrangement

B. The property has been on the open market for less than a year
C. Buyer and seller are typically motivated
D. Price is not affected by special or creative financing
Brueggeman - Chapter 10 #1

2. What does an appraisal tell about the value of a property?

A. An appraisal calculates value

B. An appraisal confirms value
C. An appraisal estimates value
D. An appraisal determines value
Brueggeman - Chapter 10 #2

3. Which of the following steps normally would be used in the cost approach to value?

A. Estimate net operating income of the property

B. Multiply accrued depreciation by the assessed cost
C. Add actual construction costs to the land value
D. Subtract accrued depreciation from the replacement cost
Brueggeman - Chapter 10 #3

4. Which of the following choices represents the main categories of depreciation?

A. Physical, external, functional

B. Physical, economic, locational
C. External, structural, financial
D. Economic, physical, external
Brueggeman - Chapter 10 #4
5. A comparable property has a feature that is superior to the subject property. What adjustment
would be made in the sales comparison approach to value?

A. Value of the feature would be subtracted from the sales price of the comparable property
B. Value of the feature would be added to the sales price of the comparable property
C. Value of the feature would be subtracted from the value of the subject property
D. Value of the feature would be added to the value of the subject property
Brueggeman - Chapter 10 #5

6. Given the following sales adjustment grid, what adjustment would be made for size?

A. $20 psf.
B. $40 psf.
C. $50 psf.
D. $35 psf.
Brueggeman - Chapter 10 #6

7. Which of the following expenses would NOT be included in an operating statement used to
calculated net operating income in the income approach to value?

A. Reserves for replacement

B. Maintenance
C. Real estate taxes
D. Capital additions
Brueggeman - Chapter 10 #7
8. A property is sold for $200,000. Typical financing terms are an 85% loan with a 10% interest
rate over 15 years. If the before-tax cash flow is $2,000, what is the overall capitalization
rate?

A. 10.96%
B. 11.96%
C. 19.13%
D. 9.96%
Brueggeman - Chapter 10 #8

9. A property produces a first-year net operating income of $24,000. Because of the long
economic life of the building, the income is considered as a perpetuity that will grow by 2.5%
per year. Using a discount rate of 9.5%, estimate that property value.

A. $276,968
B. $252,632
C. $200,000
D. $342,857
Brueggeman - Chapter 10 #9

10. A property is leased for $24,000 per year although market rents are currently $27,500 per year
and are expected to increase by 2% per year. The property is expected to be sold at the end of
year 10 based on a 10% terminal cap rate applied to the eleventh year NOI. The current lease
on the property will expire at the end of year 10 so the property can be leased in the eleventh
year at market rates. What is the value of the leased fee estate based on an 11.5% discount
rate?

A. $362,489
B. $298,325
C. $251,298
D. $271,486
Brueggeman - Chapter 10 #10

11. The discount rate is a rate that a typical investor would normally require as a(n) __________
return over investment holding period.

A. Maximum
B. Risk free
C. Expected
D. Historical
Brueggeman - Chapter 10 #11
12. Total possible income less any vacancy is __________.

A. EGI
B. PGI
C. NOI
D. GIM
Brueggeman - Chapter 10 #12

13. Which of the following is true concerning capitalization rates?

A. It is an IRR.
B. It explicitly considers projected future income and changes in property value over time
C. It expresses relationships between income and property value at a specific point in time
D. It is the rate of return that investors expect to earn on all capital invested
Brueggeman - Chapter 10 #13

14. Capitalization rates will differ from yield rates when the income is expected to __________
over time.

A. Stay the same

B. Increase
C. Decrease
D. Both B and C. Capitalization rates equal yield rates only when income doesn't change
Brueggeman - Chapter 10 #14

15. Which is not normally considered when conducting an appraisal using the cost approach?

A. Functional obsolescence
B. Effective age
C. Capitalization rate
D. Replacement cost
Brueggeman - Chapter 10 #15
16. Which lease has the lowest effective rent?

A. A Above.
B. B Above.
C. C Above.
D. D Above.
Brueggeman - Chapter 10 #16

17. When conducting an appraisal, only one of three approaches should be selected to determine
the property value.

FALSE
Brueggeman - Chapter 10 #17

18. In the cost approach to value, land value can be estimated by comparing sales of vacant land
that are similar to the subject land.

TRUE
Brueggeman - Chapter 10 #18

19. Economic obsolescence is the loss of value caused by inefficient layout of technological
changes.

FALSE
Brueggeman - Chapter 10 #19

20. A building has 12 foot ceilings that cause the electric bill to be $1,200 higher per year.
Depreciation caused by the ceilings can be estimated by calculating the present value of the
$1,200 per year over the remaining economic life of building.

TRUE
Brueggeman - Chapter 10 #20

21. A gross income multiplier can be calculated by dividing the gross income by the sales price.

FALSE
Brueggeman - Chapter 10 #21
22. An overall capitalization rate can be calculated by dividing the net operating income by the
property value.

TRUE
Brueggeman - Chapter 10 #22

23. The capitalization rate is equal to the discount rate minus any expected annual growth in
income and property value.

TRUE
Brueggeman - Chapter 10 #23

24. A property is purchased for $350,000. Based on an annual growth rate of 3%, the resale value
at the end of year 10 would be $456,671.

FALSE
Brueggeman - Chapter 10 #24

25. The capitalization rate for a leased fee estate should always be lower than the capitalization
rate for a fee simple estate.

FALSE
Brueggeman - Chapter 10 #25

26. The equity value can be estimated by subtracting debt service from net operating income and
dividing this amount by the equity dividend rate.

TRUE
Brueggeman - Chapter 10 #26

27. The market method or direct sales comparison method of estimating site value is not the most
reliable method available.

FALSE
Brueggeman - Chapter 10 #27

28. Appraisers use bracketing in order to estimate the upper and lower range of value.

TRUE
Brueggeman - Chapter 10 #28

29. Return on investment and change in net operating income are essential factors for cost
analysis.

FALSE
Brueggeman - Chapter 10 #29
30. Capitalization rate of newly constructed apartment building will be more than that of relatively
old apartment building, which is comparable in all other aspects.

FALSE
Brueggeman - Chapter 10 #30
 ch10 Summary

Category # of Questions
Brueggeman - Chapter 10 30
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Trunk Bookcase for Convenient Shipment

A Small Library may be Shipped Handily in This Bookcase

 Mechanics, engineers, and other persons are sometimes engaged
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Those who desire to carry with them a small library will find the trunk
bookcase, as shown, convenient. It may be shipped as a trunk, and
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 Bottle Carrier Made of Pipe Straps
Two metal pipe straps, fitted around the neck of a bottle and bolted
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A Developing or Etching-Tray Rocker
 An appliance that saves time for the worker in a photographic dark
room is a tray rocker, made as follows: Fasten a bracket of strap
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should extend under the edge of the table, as shown, and be
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Combination Laundry Tub and Dishwashing Sink

A saving of space and time was effected in a home kitchen by the

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 Emergency Oarlock of Rope
An oarlock that will give considerable service may be made by
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 Planing Thin Sticks Held in Flooring Groove
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 A Submarine Camera
by Charles I. Reid

Submarine photography should have great attractions for amateur

photographers who have access to lakes, ponds, and other clear
waters. While more careful work is demanded than in ordinary
photography, the method of obtaining good results is not difficult, and
the necessary equipment may be provided by constructing the
device shown in the illustration. Submarine pictures can be taken in
a considerable depth of water, providing it is reasonably free from
foreign matter. This is a fascinating field of photography, and many
pictures of educational and scientific value remain to be made of
under-water life. The illustration shows the detailed construction of
the camera chamber, and the method of suspending it from a bridge,
or other place convenient to the body of water. Reproduced in the
oval panel is a photograph of fish near baited hooks, on a fishline.
The original was made from a negative exposed by the use of the
camera chamber described.
The problem of making photographic exposures under water
involves the provision of a strong water and pressure-proof container
for the camera, a means for controlling the shutter, and a suitable
opening in the container through which the exposures may be made.
The arrangement described combines these features in a simple
manner, and by the use of materials that can be obtained without
difficulty. It was made for a camera taking 4 by 5-in. pictures, and the
dimensions given are for a container for this size. The dimensions
may be varied to adapt the device to various cameras, within
reasonable limits. A 9-in. steel pipe was used for the chamber, and
its ends were fitted with pipe caps. A heavy piece of plate glass was
fitted into the forward cap, which was cut into the shape of a ring, to
provide the exposure opening. The general arrangement of the
camera in the chamber is shown in the sectional view, Fig. 1, as
seen from the shutter end. The electrical device, by which the shutter
is controlled, is shown in this view, and in Fig. 2 it is shown in detail.
The chamber was made as follows: A section of 9-in. steel pipe
was cut to a length of 11¹⁄₂ in. and threaded on the ends to fit pipe
caps. The forward pipe cap was chucked up in a lathe and the center
portion cut away, to provide an exposure opening and a shoulder at
the rim, on which the plate-glass window rests. A graphite paint was
applied to the rim, then the glass was bedded solidly in it, and a
rubber gasket was fitted to the joint, making it waterproof when the
cap was drawn up tightly. The chamber assembled and in detail is
shown in the illustration.
Holes were bored into the top of the chamber, and eyebolts were
fitted into them. Between the eyebolts a hole was bored and fitted
with a water-tight collar, through which the wires leading to the
shutter-control device pass. The chamber is supported by the wires,
which are fixed to the eyebolts and secured at the base of operations
by the photographer.
A support for the camera was provided by bending a strip of ¹⁄₈ by
1-in. band iron to the shape indicated in Fig. 1, at A, and riveting it to
the bottom of the chamber. Its upper surface is flat and was bored
and threaded to fit the tripod thumbscrew B, on the lower surface of
the camera. The camera is arranged on the support and clamped
into place firmly by the thumb nut, as it might be on a tripod. The
adjustment of the camera in the chamber is done from the rear, and
the space beneath the thumbscrew should be large enough to make
access easy. A camera of the size indicated, when fitted with its lens
centering on the center of the window, will be raised sufficiently for
convenience in clamping it. The threads on the back cap must fit
snugly and no paint must be used on them. Hard oil, or vaseline,
may be applied to insure a water-tight joint that permits easy removal
of the cap.
The making and adjustment of the electrical shutter device
requires care, but its operation is simple. An electromagnet, of the
type used on doorbells, was fixed to the front of the camera, above
the shutter, as shown in Fig. 1, and in detail in Fig. 2. It is actuated
by current from two dry cells. The latter are kept in a convenient
carrier at the base of operations, and are connected to the magnet
by a single strand of double, waterproof wire. This is spread as it
reaches the chamber and fastened to the two eyebolts in the top.
The ends of the wires are conducted through the water-tight center
opening between the eyebolts, and attached to the magnet. The
release lever is fitted to a steel hook, pivoted at its upper end with a
small nail, C, Fig. 2. A rubber band is fixed to the lower edge of the
shutter lever and its other end is attached to the front of the camera.
When the current is permitted to flow into the magnet by pressing a
contact key, in the hand of the operator, the steel hook is drawn from
the release lever, and the rubber band draws the lever down, making
an exposure.
The double-wire cable carries the current as well as holds the
chamber suspended in the water. The wire should be about 25 ft.
long, and, in transporting the outfit, or when only partly used, is
coiled. The chamber should be completed for picture-taking
operations by giving it a coat of dull, black waterproof paint, both
inside and outside. This will prevent rusting and also serves to make
the object inconspicuous when in the water. It is important that the
interior be painted in this manner, because reflections of light within
the chamber may cause difficulty in obtaining satisfactory results.
When the paint is thoroughly dry, the device may be tested for
leakage and assembled ready for a test before making an actual trial
in the water. The camera is fitted into the chamber so that it centers
on the center of the plate-glass window, and is clamped into place. If
the electrical device operates satisfactorily the plate may be inserted,
the plate-holder slide withdrawn, the back cap replaced securely,
and the outfit lowered into the water. It should be watched carefully
until it reaches the proper depth, for, if it is permitted to touch the
bottom, the sediment stirred up must be given time to settle before
an exposure is made. The forward end of the chamber should be
marked on its upper edge with a streak of white paint, to aid in
identifying it at considerable depth in the water. This is important,
since the operator must shift the chamber carefully until the window
faces the objects to be photographed. When the chamber is in
position, the contact key is pressed and the exposure is made.
The time of exposure for under-water photography depends on the
clearness of the water, the depth at which the pictures are to be
taken, and the light conditions on the surface. A bright day is, of
course, desirable for this class of photography. A safe approximation
on a sunny day, in clear water, and with the chamber lowered to a
depth of 20 ft., is ¹⁄₂₅ sec. at the F 8 stop. The fastest plates or films
obtainable should be used for this work, making possible a fairly
rapid shutter speed. This tends to overcome the movement of the
subject and possible movement of the camera.
The camera should be focused while in the chamber in order that
the plate glass may not disturb the focus. The glass usually changes
the focal length of the lens slightly, hence this precaution must be
taken. The camera should be focused in the chamber for a distance
of 10 ft., as this is the average at which under-water photographs will
be taken ordinarily.
When attempting under-water photography in cloudy waters, or at
a considerable depth, the necessary illumination may be provided by
a charge of flash-light powder. For this purpose another submarine
chamber, similar to that used for the camera, should be provided,
with a plate glass, ¹⁄₂ in. thick, and a valve fitted into the top of the
chamber, and opening outward, so that the gas may escape. Fifteen
grains of powder will suffice, and this should be set off by a small
electrical fuse connected to the current supply.
 Fig. 1
Fig. 2
Photographing Subjects under Water Is a
Fascinating Diversion, and Each Exposure
Has an Element of Mystery in the
Uncertainty of the Result. The Photograph
Reproduced in the Oval was Taken with the
Outfit Shown. The Construction of the
Chamber is Shown at the Middle. Fig. 1
Shows a Sectional Interior View, and Fig. 2,
a Detail of the Electrical Shutter Release

Every pond, lake, and river abounds in interesting and instructive

subjects for submarine photography. Along the coast of Florida, and
at many points along the Pacific coast, are waters of such clearness
that pictures may be taken at a depth of nearly a hundred feet,
without the use of artificial illumination. These localities abound in
objects under water of great interest, such as shipwrecks. The
fascinating art of taking pictures under water does not make it
necessary for one to go to these places, for subjects are easily
available. Whenever the submarine chamber is raised from the water
there is an element of mystery involved, regarding what may be
recorded on the plate or film, and this is an attractive feature of the
diversion.