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# Free Example of Real Estate Finance Questions Essay

## The rent step

1. A rent step is a lease whereby the charges increase in the course of the lease term as agreed between the lessee and the lessor. A landlord might want a rent step based on CPI because the system can be used to identify periods of deflation and inflation thus giving them a hint on when is the best time to lease their properties (Black Enterprise, 1997, p.114).
2. An expense stop is a fixed amount, commonly calculated per square foot, in a rent where the lessee is responsible for all operating costs and duties in excess of the agreed amount. If a tenant under a Net lease has a \$5 PSF expense stop and the landlord incurs a \$9 PSF expense, then he owes the landlord \$14 PSF.
3. IRR Value, denoted by i

CF1     +CF2     +   CF+ …………..+CF4     - CF0  =0

(1+i) 1    (1+i) 2   (1+i) 3                         (1+i) n

2,000 +2,200+ 2,300+ 2,400 -245,000 =0

(1+i) 1    (1+i) 2   (1+i) 3 (1+i) 4

i =8.5%

If a 5% discount is required, then this investment is worth as indicated by the IRR value.

1. NVP

 YEAR CASH FLOW PRESENT VALUE T=1 2000/(1+0.0725)1 1864.8 T=2 2200/(1+0.075)2 1903.7 T=3 2300/(1+0.0775)3 1838.6 T=4 2400/(1+0.080)4 1400.4 T=5 2500/(1+0.0825)5 1681.9

NVP= \$8689.4- Initial investment

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1. Some of the problems in using IRR in making investment decisions are; IRR uses one discount rate to assess each investment. Even though implementation of one discount rate at time simplifies issues, it only becomes appropriate when discount rates are constant. As a result, the method becomes inadequate for long term projects whose discounts rates vary or projects with both negative and positive cash flows (Groppelli &Nikbakht, 2006, p. 165).
2. Some of the problems in using NPV in making investment decisions are that the method is intrinsically complicated and assumptions need to be made at every stage (Groppelli &Nikbakht, 2006, p. 165).
3. Leverage impacts returns by magnifying them. For instance, if a rental house is leveraged eighty-percent and its value increases by 5% in a year, its return becomes 25% due to the five times leverage magnification (Bell, 2009).
4. Investment bankers turned “B-pieces” and non-investment tranches into “AAA” rated securities by nationalizing the money supply and spending it directly into industry and projects as well as lending without simple interest.
5. A rollover risk is a risk that a leaseholder will not restore the lease. An investor may want to know about this so that he does not incur losses when this risk is high since s/he will have a choice of whether to invest or not (Dudley, 2009, p. 2).

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