Deck 19: Permanent Financing of Commercial Real Estate Properties

Question 1

A clause that allows the lender to step in and collect lease payments directly from the tenants in the event the borrower becomes delinquent on the loan is an:

A) assignment of leases
B) assignment of rents
C) assignment of payments
D) assignment of loans

Answer 1

assignment of rents

Question 2

All of the following are criteria for capital leases except:

A) the lease terms provide for the transfer of the ownership title of the property to the lessee at the end of the lease term
B) the lease contains an option to purchase the asset at a bargain price
C) the present value of the minimum lease payments is less than 90 percent of the current fair market value of the asset (less any investment tax credit retained by the lessor)
D) the lease term is equal to or greater than 75 percent of the estimated economic life of the asset

Answer 2

the present value of the minimum lease payments is less than 90 percent of the current fair market value of the asset (less any investment tax credit retained by the lessor)

Question 3

A lease that is a substitute for debt financing is:

A) operating lease
B) capital lease
C) financing lease
D) sale-leaseback lease

Answer 3

sale-leaseback lease

Question 4

An equity participating loan is when:

A) the lender has a claim to a portion of the income if it exceeds a residual amount
B) the lender shares in the income or cash flows from the property
C) a tradeoff between the owner/borrower and the lender occurs
D) all of the above

Question 5

19-17.Sale-leaseback transactions may create value for both the buyer and the seller through:

A) the repurchase agreement
B) reducing risk of ownership
C) reducing the amount of taxes paid from operating the property
D) none of the above

Question 6

19-18.If an owner sells a property under a sale-leaseback agreement he or she may be required to continue to show the property on:

A) the balance sheet as a liability
B) the income statement as an expense
C) the balance sheet as an asset
D) the income statement as a revenue

Question 7

19-19.Multi-site securitization refers to:

A) one facility is sold to a tenant
B) a pool of facilities net leased to a tenant
C) a pool of facilities net sold to a tenant
D) the facilities sold to an entity within the organization

Question 8

An advantage of leasing rather than owning an asset is:

A) a firm expects to use the asset for a long period of time
B) the knowledge by all market participants of the probability that the asset may become obsolete before the end of its physical life
C) the lessor can use the tax benefits from depreciation more than the lessee
D) all of the above

Question 9

The following statements of financial accounting standards clears any confusion and establishes rather strict rules before a sales-leaseback transaction can be treated as a sale:

A) SFAS no. 98
B) SFAS no. 66
C) SFAS no. 28
D) SFAS no. 13

Question 10

A sale-leaseback can be defined as:

A) a sale of the property with a lease from the new owner with an option to repurchase
B) a sale of the property with a lease from the new owner with no option to repurchase
C) a lease of the property with a subsequent sale
D) none of the above

Question 11

19-13.In an equity participation loan the lender offers a lower rate on the loan in exchange for:

A) a share of the cash flows from operations
B) a share of appreciation in the property
C) either a or b or both
D) title to the property

Question 12

Between residential and commercial loans the following is NOT true:

A) long-term commercial loans involve a more intricate underwriting process
B) residential loans have prepayment penalties,commercial loans do not
C) a clause in a residential loan allows the lender to step in and collect lease payments directly from the tenants in the event the borrower defaults on the loan
D) b and c

Question 13

The seller-lessee cannot account for the transaction as a sale of the property if:

A) the seller-lessee provides non-recourse financing for all or a portion of the sales price
B) the seller-lessee is not relieved of any existing debt on the property that may be assumed by the buyer-lessor
C) the seller-lessee is required to compensate the buyer-lessor for a decline in the fair market value of the property at the end of the lease term
D) all of the above

Question 14

19-12.The value of commercial real estate properties is determined primarily by:

A) income earning capacity
B) value of properties in close proximity
C) cost of constructing the property
D) none of the above

Question 15

19-14.The investor of a property may give a portion of the increase in value of the property in exchange for:

A) a share of the cash flows
B) a lower rate of interest from a lender
C) a greater share of the title to the property
D) none of the above

Question 16

19-11.The following is/are advantages of equity participation agreements for the borrower:

A) reduced risk to the owner
B) retain ownership of the property
C) lower interest obligation
D) all of the above

Question 17

19-16.A sale-leaseback refers to the situation where:

A) a property is sold and the seller leases the property from the buyer
B) a property is sold and a repurchase agreement is signed
C) a property is sold and a subsequent tax-free exchange is made
D) a property that is leased is subsequently sold

Question 18

19-15.Compared to standard loan agreements the risk of an equity participation loan:

A) is increased for the lender and the investor
B) is decreased for the lender and the investor
C) is increased for the investor and decreased for the lender
D) is increased for the lender and decreased for the investor

Question 19

19-10.Multi-site securitization involves the following except:

A) a pool of facilities are net leased to the tenant
B) a third party entity is established to build the facilities and repay debt backed by the properties and the rental receivables
C) the real estate is conveyed to the third party financier
D) more desirable by the tenant than having the developer finance each site separately if the funds are less costly