Real Estate Principles Chapter 17 Quiz 1. A property manager's budget for the property will typically include which of the following operating expenses? A. Reserves for replacement of built-ins B. Depreciation allowance C. Vacancies and bad debts D. Management fees 2. The owner of a strip mall has a rental space available. A prospective tenant who planned to start a business but had no business experience contacted the landlord about leasing the space. The tenant's earnings were expected to grow in the years ahead. If the owner wanted a long-term lease with a fair market return, which of the following types of leases would be most appropriate? A. Gross lease B. Graduated lease C. Net lease D. Percentage lease 3. A quarterly summary statement given by a property manager to her client would contain all of the following, EXCEPT: A. balance carried forward from last statement B. rent receipts C. itemized expenditures D. a recent appraisal of the property 4. An agreement between a property manager and a property owner that sets forth all the terms and conditions of the management relationship is called a: A. summary statement B. listing agreement C. management plan D. management agreement 5. The difference between the fair market value and the debt that is owed against a property is called: A. leverage B. severance C. equity D. risk capital 6. An example of a liquid asset is a/an: A. parcel of real estate B. bond C. certificate of deposit D. None of the above 2006 Rockwell Publishing Company 1
7. An investor wishing to apply the principle of leverage should invest using: A. as much of his personal funds as possible B. a mix of personal and borrowed funds C. borrowed funds as much as possible D. funds borrowed only from family and friends 8. In real estate investment, "cash flow" refers to: A. net income minus taxes and management fees B. gross income minus loss from vacancies C. gross income minus any operating expenses, interest, and principal payments D. gross income 9. In a sale-leaseback: A. the grantor becomes the grantee B. the grantor frees up his capital without giving up possession of the property C. the broker has purchased the property D. the property is sold at a loss 10. Typical duties of a property manager include: A. handling tenant complaints B. maintaining the premises C. collecting rent D. All of the above 11. What would a typical property management agreement obligate a property manager to do? A. Prepare a weekly expense report B. Prepare a bi-monthly tax report C. Prepare a semi-annual expense report D. Prepare a summary statement regularly at pre-agreed intervals 12. Which of the following would NOT typically be a responsibility of a property manager? A. Maintain detailed financial records for all managed properties B. Market the property C. Periodically appraise managed properties and make detailed report to the owners D. Negotiate leases and handle tenant relations 13. A lease in which the rent is set at a fixed amount and the landlord pays most or all of the operating expenses is called a: A. gross lease B. net lease C. ground lease D. index lease 14. A lease that provides for rent adjustments based on changes in a price index, such as the Consumer Price Index, is called a/an: A. percentage lease B. index lease C. ground lease D. net lease 2006 Rockwell Publishing Company 2
15. A major department store leases a large space in a local mall, and it agrees to pay the mall owner, in addition to a base rent, a percentage of its gross earnings. What kind of lease has the store entered into? A. A percentage lease B. A gross lease C. A net lease D. A ground lease 2006 Rockwell Publishing Company 3
Answer Key with Explanations 1. D Explanation: The management fee is the only operating expense listed. Other operating expenses include utilities, repairs, property taxes, and insurance. Bad debts and vacancies represent revenues not collected, not operating expenses. 2. B Explanation: This is a lease in which the rent payments commence at a fixed, often low rate, but step up or increase at intervals as the lease term matures. This gives long-term commercial tenants an opportunity to get started in business without a heavy rent burden during the early years. 3. D Explanation: The property manager might want to share with the owner the conclusions of a recent appraisal, but it wouldn't be done in the summary statement. A summary statement is a brief report showing the property's financial status over a period of time. 4. D Explanation: The management agreement must be in writing and signed by both parties. It contains all the terms and conditions of the agreement. 5. C Explanation: This is a definition of equity. 6. D Explanation: Real estate is considered an illiquid asset because it is not easily convertible into cash. Bonds and certificates of deposit are investments where the investor's money is tied up for a specific period of time. As a result, the liquidity of these investments is less than stocks or mutual funds. 7. C Explanation: An investor using leverage should use as much borrowed money as possible and as little of his own money as possible. 8. C Explanation: Cash flow is the gross income left over after the property's operating expenses, mortgage payments, and taxes have all been paid. 9. B Explanation: The seller (grantor) sells the property and frees up capital, but retains possession of the land as a tenant. 10. D Explanation: A property manager usually handles all of the above responsibilities. 2006 Rockwell Publishing Company 4
11. D Explanation: The management agreement typically requires the broker to submit summary statements to the property owner on a regular basis, at intervals specified in the agreement. 12. C Explanation: The property manager is not expected to appraise the properties she manages. 13. A Explanation: This describes a gross lease. 14. B Explanation: A lease that calls for increases in a lease's rental payments that are tied to an index is called an index lease. 15. A Explanation: This is a percentage lease. Percentage leases are most common in shopping centers. 2006 Rockwell Publishing Company 5