CAPS Financial Management and Budgeting 2 — Questions and Answers
Question 1: A Debt Service Coverage Ratio (DSCR) of 1.25 means what in practical terms?
- NOI covers debt service by 25% more than required (Correct answer)
- The property is 25% leveraged
- Cash flow is 25% below break-even
- Vacancy is at 25%
Correct answer: NOI covers debt service by 25% more than required
A DSCR of 1.25 means the property generates $1.25 in NOI for every $1.00 of debt service, providing a 25% buffer.
Question 2: What is zero-based budgeting (ZBB) and how does it differ from incremental budgeting?
- ZBB builds each budget line from scratch each year; incremental adjusts prior-year figures (Correct answer)
- ZBB starts at zero revenue; incremental assumes full occupancy
- ZBB eliminates all discretionary spending; incremental does not
- ZBB uses historical averages; incremental uses projections
Correct answer: ZBB builds each budget line from scratch each year; incremental adjusts prior-year figures
Zero-based budgeting requires justifying every expense from a zero base each period, unlike incremental budgeting which adjusts prior-year figures.
Question 3: Which financial statement shows a property's cash inflows and outflows from operations, investing, and financing activities?
- Statement of Cash Flows (Correct answer)
- Income Statement
- Balance Sheet
- Rent Roll
Correct answer: Statement of Cash Flows
The Statement of Cash Flows categorizes all cash movements into operating, investing, and financing activities for a given period.
Question 4: When preparing a portfolio-level operating budget, what is the purpose of a rent roll?
- It provides a detailed listing of all units, lease terms, and current rents to project revenue (Correct answer)
- It tracks vendor payments due for the month
- It summarizes capital expenditures by property
- It records security deposit balances
Correct answer: It provides a detailed listing of all units, lease terms, and current rents to project revenue
A rent roll lists every unit with its current rent, lease expiration, and tenant details, forming the foundation for revenue projections.
Question 5: What does the term 'loss-to-lease' represent in multifamily financial analysis?
- The difference between market rent and actual contracted rent on occupied units (Correct answer)
- Revenue lost due to vacant units
- Expense overruns on lease-up properties
- Concessions given at lease signing
Correct answer: The difference between market rent and actual contracted rent on occupied units
Loss-to-lease is the gap between current market rent and the lower rent a tenant is currently paying under an existing lease.
Question 6: Which approach should a CAPS manager use when a portfolio property's actual expenses consistently exceed budget by 15%?
- Conduct a line-by-line expense audit and revise budget assumptions (Correct answer)
- Reduce planned maintenance to cut costs immediately
- Transfer funds from the capital reserve
- Issue a corrective action plan to all vendors
Correct answer: Conduct a line-by-line expense audit and revise budget assumptions
A systematic expense audit identifies root causes of overruns and enables accurate reforecasting and operational corrections.
CAPS Financial Management and Budgeting 2
A Debt Service Coverage Ratio (DSCR) of 1.25 means what in practical terms?