For each of the following situations, the transaction may (or may not) be eligible (fully or partially) for tax-deferred

For each of the following situations, the transaction may (or may not) be eligible (fully or partially) for tax-deferred

For each of the following situations, the transaction may (or may not) be eligible (fully or partially) for tax-deferred

FINC 4371 R E FINANCE AND INVESTMENT Prof LindemanFall, 2015TAKE-HOME FINAL EXAMINATIONDue no later than midnight, Friday, December 11.E-mail your exam to [email protected] (MS Word attachment, single-spaced, or in the body of the email). Since this is a take-home examination, I am looking for thoughtful, thorough, exhaustive answers that don’t parrot exactly what’s in the books or what I said in class.I. You MUST answer questions 1, 2, 3, and 4(1) For each of the following situations, the transaction may (or may not) be eligible (fully or partially) for tax-deferred treatment. (Assume that the exchanged properties are of equal value, with no mortgages or other loans against any of it.) For each, explainfor both parties the extent of the tax-deferred eligibility, and explain WHY.(a) I exchange my large home to Ann, for her small office building. She wants to tear down my house and build an apartment building on the site.(b) Melvin, a builder, built five condos, but they aren’t selling. He exchanges them to me for my apartment building. I will rent out four of the condos and live in the fifth one.(c) I exchange my office building to Fred for his auto dealership; I get several buildings, a lot of land, and 111 new, unsold cars. I have arranged to lease the entire site to Flo, who will go into the car sales business; she also will buy the 111 cars from me.(2) Jones’s parking lot is worth $800,000. He has a mortgage loan of $420,000 against it. All the parking spaces are leased to people who park there during business hours.Smith’s gas station is worth $900,000 (it is leased for the next 20 years to Brown, who runs the business there.) Smith has a mortgage loan of $400,000 against her gas station property.Jones and Smith wish to exchange their properties. Both are eligible for tax-deferred status.(a) Tell me why they are.(b) If they exchange, will either of them be at least partially liable for taxation on the transaction? If so, whom, how much, and why?(3) Melinda is buying a house. She wants to get a mortgage loan for $80,000, and she has two choices. The closing costs for both loans are the same.The first is a fixed-rate loan, at 4.875% interest.The second is an adjustable rate loan (ARM). The first year’s interest rate is 3.25%. The interest rate maximum adjustment caps are 2% per year, and 6% lifetime. The index is the 1-year T-bill moving average. The adjustment margin is the index plus 2.75%. Currently the index is 2.05% and it has been falling steadily for over a year.Melinda asks you tobrieflyexplain these loan terms to her, and tobrieflytell her what sorts of things she should consider in making her decision. She doesnotask you to make the actual decision for her — you don’t have to tell her which is better; only tell her what she needs to think about when she makes her decision.(4) Jack is considering buying one of two houses. House A costs $ 150,000. It will require him to get a new loan for 80% of the purchase price; the closing costs on this loan will be $3,700. The loan will be a fixed-rate loan for 30 years at 5.0% interest.House B is identical to house A (it’s right next door), except for the price and the financing. The price is $155,000; also, it comes with a fully assumable fixed-rate loan for $127,000, at 3.875% interest. The loan is two years old, so it has 28 years left. The closing costs to assume this loan are $1,500.Tell Jack which house to buy, and why.II. Answer your choice ofthree (3) of the following 5 questions.(5) [Did you read the book?] What is awraparound mortgage? Why would anyone consider a “wrap”? Who “wins” and who “loses”? Why? Make up an example of one and describe it.(6) Why are construction loans riskier for lenders than “permanent” loans?(7) Sam wants to build a medium-sized office building (15 stories). There are two possible sites available; they are equal in terms of location, buildability, etc. The only significant difference is that Site A must be purchased. Site B is only available on long-term (50-year) lease. Sam immediately chooses to negotiate terms for the use of site B. Why would he do that?(8) Explain why the economics of the market for commercial and investment real estate doesn’t fit well with the “blackboard” example of markets as presented in basic economics classes.(9) Real estate investors expect a much higher return on their investments than, say, investors in high-grade bonds. This is because the risks involved in real estate are perceived as being a lot greater than for many other kinds of investments. What are some of these additional risks associated with real estate investment? ( Name anddescribeat least 4.)

 

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