Real Estate Practice Exam 4

Question 1

An example of functional obsolescence is which of the following?

Accepted Answer

four bedroom, one bath house

Answer

Functional obsolescence refers to a loss in value due to an outdated or poorly designed feature within the property itself, making it less desirable or efficient by current standards. A four-bedroom, one-bath house is a classic example because modern buyers typically expect more bathrooms for a house with that many bedrooms, making the design functionally inadequate. This internal design flaw reduces the property's market appeal and value.

Question 2

Investor Charles Greenacre is purchasing a building from the Acme Tool Company with a 20-year net-net-net leaseback offering outstanding cash throwoff and good tax treatment. The building was built to the seller's needs under strict specifications to the seller's business. Greenacre should be most concerned with

Accepted Answer

the financial condition of the seller.

Answer

In a net-net-net (triple net) leaseback, the tenant (the seller, in this case) is responsible for nearly all property expenses, including taxes, insurance, and maintenance. If the seller's financial condition deteriorates, they may be unable to meet these lease obligations, potentially leaving the investor (Greenacre) with an empty, specialized building and significant financial liabilities. The building's specific construction for the seller's business further exacerbates this risk, as it might be difficult to re-lease to a new tenant.

Question 3

An appraiser noted a 3 year-old air conditioning system which was operable. He assigned $2,500 depreciation to the system. What type of depreciation is it?

Accepted Answer

incurable physical deterioration

Answer

Physical deterioration refers to the wear and tear on a property due to age and use. An air conditioning system that is three years old and operable but assigned depreciation suggests it's experiencing normal wear and tear that is not economically feasible to fully restore to new condition, making it 'incurable' in the context of a typical appraisal. 'Curable' physical deterioration would be something like a broken window that is cost-effective to fix, while functional obsolescence relates to design flaws.

Question 4

Which two expenses are deductible for income taxes that are not deducted in calculating net operating income?

Accepted Answer

interest and depreciation

Answer

Net Operating Income (NOI) is calculated by subtracting operating expenses (like utilities, property taxes, insurance, and management fees) from effective gross income. However, interest on a mortgage and depreciation are not considered operating expenses for NOI calculation because they are financing and accounting deductions, respectively. These two expenses are deductible for income tax purposes, reducing the taxable income, but they do not reflect the property's operational profitability before financing and tax considerations.

Question 5

If the capitalization rate increases, the value

Accepted Answer

decreases.

Answer

The capitalization rate (cap rate) is used in real estate to estimate the value of income-producing properties. The formula is Value = Net Operating Income / Capitalization Rate. Therefore, if the capitalization rate increases while the net operating income remains constant, the calculated value of the property will decrease, as the cap rate is in the denominator.

Real Estate License Practice Test

Real Estate License Practice Test

Real Estate Practice Exam 4