3.4 Real Estate Assets and Debt

Question 1

The 100% PSA model starts in month 0 with a 0% conditional prepayment rate (CPR). The CPR is then assumed to increase by __% each month until it peaks at __% at 30 months. After the 30th month, the model assumes the CPR is __%

PSA: _____
CPR: _____

Answer 1

The 100% PSA model starts in month 0 with a 0% conditional prepayment rate (CPR). The CPR is then assumed to increase by 0.2% each month until it peaks at 6% at 30 months. After the 30th month, the model assumes the CPR is 6%.

Question 2

Which of the following best describes the tax implications of most REIT structures?

REITs pay taxes (YES/NO) on income passed onto shareholders. REIT shareholders pay (YES/NO) taxes on the dividends received.

Answer 2

REITs pay NO taxes on income passed onto shareholders, but REIT shareholders PAY taxes on the dividends received.

REITs have a pass-through income tax status: they do not pay taxes on income and capital gains passed on to their shareholders. However, tax-paying shareholders must pay taxes on distributions received from REITs at the ordinary income tax rate.

Question 3

Prepayment option

Answer 3

option to prepay gives the borrower a call option on the value of the debt, enabling him to repurchase his loan at a fixed strike price (which is similar to a callable bond).

put option on mortgage rates

Question 4

REITs must earn ____% of their income from real estate activities and must pay ____% or more of their taxable income to their shareholders.

Answer 4

REITs must earn 75% of their income from real estate activities and must pay 90% or more of their taxable income to their shareholders.