CRECI Commercial Property Financials 3 — Questions and Answers
Question 1: In a discounted cash flow (DCF) analysis for a commercial property, the 'terminal value' is typically calculated using which method?
- Applying a cap rate to the final year's projected NOI (Correct answer)
- Summing all future cash flows
- Multiplying purchase price by inflation rate
- Dividing total rent by holding period
Correct answer: Applying a cap rate to the final year's projected NOI
Terminal value (reversion) is most commonly estimated by applying a terminal (exit) cap rate to the NOI projected in the year following the holding period.
Question 2: What does a 'load factor' (also called add-on factor) represent in commercial leasing?
- The ratio of debt to equity in a deal
- The percentage added to usable square footage to arrive at rentable square footage (Correct answer)
- The cost of tenant improvements per square foot
- The vacancy rate applied to gross income
Correct answer: The percentage added to usable square footage to arrive at rentable square footage
The load factor converts usable square footage to rentable square footage by adding a proportionate share of common areas.
Question 3: An office building's proforma shows $1,200,000 in potential gross income, $96,000 in vacancy loss, and $350,000 in operating expenses. What is the NOI?
- $754,000 (Correct answer)
- $850,000
- $1,104,000
- $446,000
Correct answer: $754,000
NOI = ($1,200,000 − $96,000) − $350,000 = $1,104,000 − $350,000 = $754,000.
Question 4: Which lease structure requires the tenant to pay base rent plus all property operating expenses including taxes, insurance, and maintenance?
- Gross lease
- Modified gross lease
- Triple net (NNN) lease (Correct answer)
- Percentage lease
Correct answer: Triple net (NNN) lease
Under a triple net lease, the tenant bears responsibility for taxes, insurance, and maintenance in addition to base rent.
Question 5: What is the purpose of a sensitivity analysis in commercial real estate financial modeling?
- To calculate depreciation for tax purposes
- To test how changes in key assumptions affect investment returns (Correct answer)
- To determine the legal zoning classification
- To verify tenant creditworthiness
Correct answer: To test how changes in key assumptions affect investment returns
Sensitivity analysis evaluates how changes in variables such as cap rate, vacancy, or rent growth impact projected returns like IRR or NPV.
Question 6: A mixed-use property generates $900,000 NOI and sells for $12,000,000. What is the going-in cap rate?
- 6.5%
- 7.5% (Correct answer)
- 8.0%
- 9.0%
Correct answer: 7.5%
Cap rate = NOI ÷ Purchase Price = $900,000 ÷ $12,000,000 = 7.5%.
Question 7: In commercial real estate, 'replacement reserves' in a proforma are best described as:
- Cash reserves held by the lender in escrow
- Annual budget set aside for future major capital repairs (Correct answer)
- Tenant security deposits collected at lease signing
- Funds required by zoning authorities
Correct answer: Annual budget set aside for future major capital repairs
Replacement reserves are a non-cash expense line item that accounts for the periodic need to replace major building components like HVAC, roofing, or parking lots.
CRECI Commercial Property Financials 3
In a discounted cash flow (DCF) analysis for a commercial property, the 'terminal value' is typically calculated using which method?