Real Estate

The major asset classes typically include equities, fixed income, cash, and:

1. A.TaxesTaxes are a cost applied to returns, not something an investor can hold. Asset classes are categories of investable assets, and taxes belong to the after-tax analysis instead.
2. B.DividendsA dividend is income thrown off by an asset class rather than a class in its own right. This confuses the payout with the holding that generates it.
3. C.InterestSame category error on the fixed income side. Interest is the cash flow that bonds and cash equivalents produce, not a fourth or fifth class of assets to allocate among.
4. D.AlternativesCorrect - the fourth broad class.

Why: Alternatives (real estate, commodities, private assets) round out the major asset classes.

A real estate program's offering documents include an independent appraisal of the properties to be acquired. What is the due diligence obligation with respect to that appraisal?

1. A.None -- an appraisal prepared by an independent, licensed appraiser may always be relied upon without further examination of its assumptions.Wrong. Independence and licensure do not excuse examining the appraisal's assumptions.
2. B.Examine the appraisal's methodology and the reasonableness of its underlying assumptions, such as the comparable properties and capitalization rates used, rather than simply accepting the appraised value.Correct. The firm must evaluate the assumptions behind the appraised value, not just the value itself.
3. C.Obtain a second, competing appraisal for every property in the program, since a single appraisal is never sufficient regardless of its quality.Wrong. A single well-examined appraisal can be sufficient; a second appraisal is not categorically required.
4. D.Confirm only that the appraisal is dated within the same calendar year as the offering, since timeliness alone establishes reliability.Wrong. Timeliness alone does not establish the reliability of an appraisal's substance.

Why: The firm must examine the appraisal's methodology and the reasonableness of its underlying assumptions, such as the comparable properties and capitalization rates used, rather than simply accepting the appraised value.

Which statement about a real estate investment trust (REIT) is true?

1. A.It is a type of limited partnershipA REIT is a trust or corporation, not a limited partnership.
2. B.It passes operating losses through to shareholdersREITs pass through income but not losses; that is a limited partnership feature.
3. C.Distributing at least 90 percent of taxable income lets it avoid corporate tax on that incomeCorrect — the 90 percent distribution test is central to REIT tax treatment.
4. D.It invests only in government bondsREITs invest in real estate equity or mortgages, not government bonds.

Why: A REIT that distributes at least 90 percent of its taxable income to shareholders generally avoids corporate income tax on that distributed income. REITs are not limited partnerships and do not pass through operating losses to investors.

An investor exchanges undeveloped raw land for a fully constructed, income-producing rental building. Both properties are real property held for investment. Does this exchange satisfy the like-kind requirement?

1. A.No, because raw land and an improved building are fundamentally different grades and qualities of real estateWrong. Real property like-kind treatment does not turn on grade or quality; it is interpreted broadly by nature and character.
2. B.No, because like-kind treatment requires the properties to generate the same type of income, such as both being rental income-producingWrong. There is no requirement that the properties generate the same type of income; raw land generating no income can still be like-kind to an income-producing building.
3. C.Yes, but only if the raw land and the building are located in the same stateWrong. Location is not a like-kind requirement for real property exchanges.
4. D.Yes, because virtually all real property held for investment or business use is considered like-kind to other such real property, regardless of grade or qualityCorrect. Real property like-kind treatment is broad, so raw land and an improved building both held for investment can qualify.

Why: For real property, like-kind is interpreted broadly by nature and character rather than grade or quality, so raw land and improved real estate can exchange for each other and still qualify.