CRECI Investment Analysis and Portfolio Strategy 2 — Questions and Answers
Question 1: A commercial property generates $300,000 in gross potential rent, has a 10% vacancy allowance, and $80,000 in operating expenses. What is the NOI?
- $190,000 (Correct answer)
- $220,000
- $250,000
- $270,000
Correct answer: $190,000
$300,000 × 0.90 = $270,000 effective gross income; $270,000 − $80,000 = $190,000 NOI.
Question 2: Which term describes the ratio of a property's annual gross rents to its purchase price, used as a quick valuation shortcut?
- Cap rate
- Cash-on-cash return
- Gross rent multiplier (Correct answer)
- Equity yield rate
Correct answer: Gross rent multiplier
The GRM equals purchase price divided by annual gross rents and provides a simple comparison across similar properties.
Question 3: In a discounted cash flow analysis, what does the 'reversion value' represent?
- The original purchase price of the property
- The projected sales proceeds at the end of the holding period (Correct answer)
- The cumulative depreciation taken during ownership
- The outstanding loan balance at disposition
Correct answer: The projected sales proceeds at the end of the holding period
The reversion value (or terminal value) is the estimated net proceeds from selling the property at the end of the projection period.
Question 4: An investor expects to sell a commercial property in Year 5 at an exit cap rate of 7.5% when Year 6 NOI is projected at $225,000. What is the estimated terminal value?
- $2,700,000
- $3,000,000 (Correct answer)
- $3,375,000
- $3,750,000
Correct answer: $3,000,000
$225,000 / 0.075 = $3,000,000 terminal value using the going-out cap rate applied to next year's NOI.
Question 5: Which portfolio risk concept refers to the risk inherent to the overall commercial real estate market that cannot be eliminated through diversification?
- Idiosyncratic risk
- Systematic risk (Correct answer)
- Liquidity risk
- Leasing risk
Correct answer: Systematic risk
Systematic (market) risk affects all properties and cannot be diversified away, unlike property-specific idiosyncratic risk.
Question 6: What is a common benchmark used by institutional investors to evaluate commercial real estate investment performance in the United States?
- S&P 500 Index
- NCREIF Property Index (NPI) (Correct answer)
- Dow Jones REIT Index
- Bloomberg Barclays Aggregate Bond Index
Correct answer: NCREIF Property Index (NPI)
The NCREIF Property Index tracks unleveraged returns of institutional-grade commercial properties held by pension funds and advisors.
Question 7: Which approach to commercial real estate valuation is most commonly used for income-producing properties and relies on projected cash flows?
- Sales comparison approach
- Cost approach
- Income capitalization approach (Correct answer)
- Assessed value approach
Correct answer: Income capitalization approach
The income capitalization approach values a property based on its ability to generate future income, making it most applicable to investment properties.
CRECI Investment Analysis and Portfolio Strategy 2
A commercial property generates $300,000 in gross potential rent, has a 10% vacancy allowance, and $80,000 in operating expenses.
What is the NOI?