Question

1. Answer true or false and comment briefly if necessary

1. Debt holders generally have preferred claims on the firm’s assets compared to equity investors.

2. Condo A is more liquid than condo B. This means that Condo A will be easier to sell than Condo B.

3. Vacancy is taken out of a property’s cash flow after NOI.

4. A high LTV means there is a lot of debt relative to value on a property.

5. Cash returns never change over the course of a property’s life.

6. A gross lease is a lease where the landlord pays all operating expenses.

7. $100 in five years is worth less than $100 tomorrow.  

8. The discount rate is used to account for inflation only.

9. If the capitalization rate is high, the property value is also high.  

Answer 1

1] True

In the case of liquidation or bankruptcy, the debt holders will be paid off before any payment is made to equity investors.

2] True

A liquid asset can be sold quickly without any significant loss in its value. This means that a liquid asset is easier to sell than an illiquid asset.

3] False

Vacancy is taken out before NOI. Gross operating income = gross potential income - vacancy and credit loss.

Net operating income = gross operating income - operating expenses.

4] True

LTV is the loan-to-value ratio. A higher ratio means that the amount of debt is high relative to the value of the property.