REA Financial Modeling & Investment Analysis 3

Question 1

A developer underwrites a mixed-use project with a stabilized NOI of $900,000 and a 6% market cap rate. If total project cost is $16,000,000, what is the development spread?

Accepted Answer

+37.5 bps

Answer

Yield on cost = $900,000 / $16,000,000 = 5.625%; development spread vs. 6% cap rate = −37.5 bps, indicating the project destroys value at current costs.

Question 2

Which metric measures the annual return on total asset value regardless of financing?

Accepted Answer

Capitalization rate

Answer

The capitalization rate measures NOI as a percentage of asset value and is unaffected by financing structure.

Question 3

In a joint venture waterfall, a 'catch-up' provision typically allows the:

Accepted Answer

GP to receive a disproportionate share of profits until reaching its target promote

Answer

A catch-up clause lets the GP receive the majority of distributions until it has been paid its cumulative promote percentage.

Question 4

Straight-line rent averaging is most commonly used when underwriting:

Accepted Answer

Office leases with free rent and scheduled rent steps

Answer

GAAP straight-line rent averaging smooths free rent periods and scheduled increases over the full lease term, most applicable to long-term commercial leases.

Question 5

What is the primary purpose of a ground lease in real estate financial modeling?

Accepted Answer

To separate land ownership from improvements and generate a ground rent obligation

Answer

A ground lease separates land and building ownership, with the lessee paying ground rent and owning only the leasehold improvements.

(REA) Real Estate Analyst Certification Practice Test

(REA) Real Estate Analyst Certification Practice Test

REA Financial Modeling & Investment Analysis 3