Physician-Owned Real Estate Quiz (no answers)

10 Questions to Test Your Real Estate Knowledge

PHYSICIANS VS. EXECUTIVES
Answers with explanations will be provided at the final session of CPOMP 2024. Click the save button to return to and complete at a later time; select "Skip Create Account" when prompted. Submission of this quiz by 8 AM on 9/21/24 will enter you into a drawing for a $500 gift card.

Questions are based on the following scenario.

A medical practice has 14 partners, 10 of whom will invest equally to construct a 40,000 SF medical office building (MOB) at a total cost of $21MM. The annual triple-net rent will be set to produce an 8.00% Return on Investment ($1.68MM). There is no annual rent escalator. The as-complete appraised value is $20MM. The doctors secure a construction-to-permanent loan with the following terms:
- 12-month interest-only period followed by a 10-year term using a 25-year mortgage-style amortization
- Fixed-rate of 5.50% (contingent upon the building being owner-occupied by the practice)
- Personal joint and several guarantees of 125% pro-rata
- Debt approved at lesser of 80% loan-to-value (LTV) or loan-to-cost (LTC)
- Debt service coverage ratio of at least 1.20x post-distribution
1. How much cash equity will the partners have to contribute to fund the project?

a) $5 MMb) $4 MMc) $4.2 MMd) None of the above

Revisit the scenario -

A medical practice has 14 partners, 10 of whom will invest equally to construct a 40,000 SF medical office building (MOB) at a total cost of $21MM. The annual triple-net rent will be set to produce an 8.00% Return on Investment ($1.68MM). There is no annual rent escalator. The as-complete appraised value is $20MM. The doctors secure a construction-to-permanent loan with the following terms:
- 12-month interest-only period followed by a 10-year term using a 25-year mortgage-style amortization
- Fixed-rate of 5.50% (contingent upon the building being owner-occupied by the practice)
- Personal joint and several guarantees of 125% pro-rata
- Debt approved at lesser of 80% loan-to-value (LTV) or loan-to-cost (LTC)
- Debt service coverage ratio of at least 1.20x post-distribution
2. Once the building is completed and rent payments start, how much cash must the partners withhold at the end of the year to meet a debt service coverage ratio (DSCR) of at least 1.20x pre- and post-distribution?

a) At least 20% of the annual rental incomeb) At least 20% of the annual debt paymentsc) The entity is not required to withhold any distributionsd) None of the above

Revisit the scenario -

A medical practice has 14 partners, 10 of whom will invest equally to construct a 40,000 SF medical office building (MOB) at a total cost of $21MM. The annual triple-net rent will be set to produce an 8.00% Return on Investment ($1.68MM). There is no annual rent escalator. The as-complete appraised value is $20MM. The doctors secure a construction-to-permanent loan with the following terms:
- 12-month interest-only period followed by a 10-year term using a 25-year mortgage-style amortization
- Fixed-rate of 5.50% (contingent upon the building being owner-occupied by the practice)
- Personal joint and several guarantees of 125% pro-rata
- Debt approved at lesser of 80% loan-to-value (LTV) or loan-to-cost (LTC)
- Debt service coverage ratio of at least 1.20x post-distribution
3. The partners wish to pay down the debt more quickly and are considering the option of a 15-year repayment period with annual payments of $1.57 MM instead of the 25-year repayment option with annual payments of $1.18 MM. If they did elect a 15-year amortization, it would:

a) Enhance the return on equity to the partnersb) Reduce the future buy-in amount for new partnersc) Reduce the amount of annual interest expensed) Create a breach in the loan covenantse) a & cf) c & d

Revisit the scenario -

A medical practice has 14 partners, 10 of whom will invest equally to construct a 40,000 SF medical office building (MOB) at a total cost of $21MM. The annual triple-net rent will be set to produce an 8.00% Return on Investment ($1.68MM). There is no annual rent escalator. The as-complete appraised value is $20MM. The doctors secure a construction-to-permanent loan with the following terms:
- 12-month interest-only period followed by a 10-year term using a 25-year mortgage-style amortization
- Fixed-rate of 5.50% (contingent upon the building being owner-occupied by the practice)
- Personal joint and several guarantees of 125% pro-rata
- Debt approved at lesser of 80% loan-to-value (LTV) or loan-to-cost (LTC)
- Debt service coverage ratio of at least 1.20x post-distribution
4. Due to an unfortunate set of circumstances, the practice disbands before the completion of the building. The loan is in default and the bank takes possession of the building. The building is sold at a loss and the bank suffers a $2.5 MM deficiency. Under the loan terms, the bank would have the right to recover:

a) Up to $250,000 from each of the 10 doctors.b) Up to $312,500 from each of the 10 doctors, not to exceed an aggregate of $2.5MM.c) Up to $2MM from each of the 10 doctors, not to exceed an aggregate of $2.5MM.d) The entire $2.5MM from any one doctor or group of doctors.e) None of the above.

Revisit the scenario -

A medical practice has 14 partners, 10 of whom will invest equally to construct a 40,000 SF medical office building (MOB) at a total cost of $21MM. The annual triple-net rent will be set to produce an 8.00% Return on Investment ($1.68MM). There is no annual rent escalator. The as-complete appraised value is $20MM. The doctors secure a construction-to-permanent loan with the following terms:
- 12-month interest-only period followed by a 10-year term using a 25-year mortgage-style amortization
- Fixed-rate of 5.50% (contingent upon the building being owner-occupied by the practice)
- Personal joint and several guarantees of 125% pro-rata
- Debt approved at lesser of 80% loan-to-value (LTV) or loan-to-cost (LTC)
- Debt service coverage ratio of at least 1.20x post-distribution
5. It was just a bad dream, and the practice is doing just fine! After the construction is completed and before rent payments start, there are 2 physician buy-ins. The real estate entity now has 12 equal partners. The 2 new partners each put in 1/12th of the total cash equity (the building is valued at cost) and the buy-in amount is shared equally among the original 10 doctors. If the property is sold after 5 years of operation at a sale price of $21.5 MM and the proceeds are shared equally among the 12 doctors:

a) The two new partners will realize a better Internal Rate of Return (IRR) than the original partners.b) All partners will realize equal IRRs.c) The original partners will realize a better IRR than the two new partners.

Revisit the scenario -

A medical practice has 14 partners, 10 of whom will invest equally to construct a 40,000 SF medical office building (MOB) at a total cost of $21MM. The annual triple-net rent will be set to produce an 8.00% Return on Investment ($1.68MM). There is no annual rent escalator. The as-complete appraised value is $20MM. The doctors secure a construction-to-permanent loan with the following terms:
- 12-month interest-only period followed by a 10-year term using a 25-year mortgage-style amortization
- Fixed-rate of 5.50% (contingent upon the building being owner-occupied by the practice)
- Personal joint and several guarantees of 125% pro-rata
- Debt approved at lesser of 80% loan-to-value (LTV) or loan-to-cost (LTC)
- Debt service coverage ratio of at least 1.20x post-distribution
6. After 5 years of operation (and P&I payments), the loan balance is now $14.3 MM. Assuming an annual property value appreciation rate of 2%, the building is now worth $23.2 MM. A new partner joins the 12 existing partners and buys an equal share ($685K) based on the current equity of $8.9 MM (making it 13 partners in total). As a result, the new doctor buying in will have a return on equity that is:

a) Better than the original investors but worse than the 2 buying in immediately after construction.b) Better than the 2 buying in immediately after construction but worse than the original investors.c) Better than all 12 current investors.d) Worse than all 12 current investors.e) Equal to all 12 current investors.

Revisit the scenario -

A medical practice has 14 partners, 10 of whom will invest equally to construct a 40,000 SF medical office building (MOB) at a total cost of $21MM. The annual triple-net rent will be set to produce an 8.00% Return on Investment ($1.68MM). There is no annual rent escalator. The as-complete appraised value is $20MM. The doctors secure a construction-to-permanent loan with the following terms:
- 12-month interest-only period followed by a 10-year term using a 25-year mortgage-style amortization
- Fixed-rate of 5.50% (contingent upon the building being owner-occupied by the practice)
- Personal joint and several guarantees of 125% pro-rata
- Debt approved at lesser of 80% loan-to-value (LTV) or loan-to-cost (LTC)
- Debt service coverage ratio of at least 1.20x post-distribution
7. After seven years of operation, 2 new partners would like to buy in (making it 15 partners in total). Because of the reduced debt and appreciated value, the buy-in cost is now quite high. To facilitate these 2 buy-ins, the group offers these potential partners 2 options (with the same loan terms & amortization): 1. The practice will guarantee a bank loan to the new doctors at 6%. 2. The real estate entity will finance the buy-ins internally at 6%. By internally financing the buy-in at the same rate as the bank:

a) The debt payment would be the same for the new partners, but the return to the existing partners who receive the interest would improve.b) The debt payment for the new partners and the return to existing partners would be the same.c) The debt payment for the new partners would be the same, but the return to existing partners would be lowered.

Revisit the scenario -

A medical practice has 14 partners, 10 of whom will invest equally to construct a 40,000 SF medical office building (MOB) at a total cost of $21MM. The annual triple-net rent will be set to produce an 8.00% Return on Investment ($1.68MM). There is no annual rent escalator. The as-complete appraised value is $20MM. The doctors secure a construction-to-permanent loan with the following terms:
- 12-month interest-only period followed by a 10-year term using a 25-year mortgage-style amortization
- Fixed-rate of 5.50% (contingent upon the building being owner-occupied by the practice)
- Personal joint and several guarantees of 125% pro-rata
- Debt approved at lesser of 80% loan-to-value (LTV) or loan-to-cost (LTC)
- Debt service coverage ratio of at least 1.20x post-distribution
8. After year 8, the partners decide to do a cash-out refinance to take out equity from their existing building and use the proceeds to fund the capital required for a new project. The lender is offering a floating-rate loan, and the rate can be synthetically fixed with an interest rate swap. If the swap is terminated before its maturity date, which statement is true?

a) The borrower must pay the lender if the swap has more than half of the term left.b) There will be a positive or negative value that is recognized depending on how market interest rates have changed.c) The borrower is exempt from paying a penalty if they refinance with the same lender

Revisit the scenario -

A medical practice has 14 partners, 10 of whom will invest equally to construct a 40,000 SF medical office building (MOB) at a total cost of $21MM. The annual triple-net rent will be set to produce an 8.00% Return on Investment ($1.68MM). There is no annual rent escalator. The as-complete appraised value is $20MM. The doctors secure a construction-to-permanent loan with the following terms:
- 12-month interest-only period followed by a 10-year term using a 25-year mortgage-style amortization
- Fixed-rate of 5.50% (contingent upon the building being owner-occupied by the practice)
- Personal joint and several guarantees of 125% pro-rata
- Debt approved at lesser of 80% loan-to-value (LTV) or loan-to-cost (LTC)
- Debt service coverage ratio of at least 1.20x post-distribution
9. The new project was postponed and the cash-out refinance to produce the equity was cancelled. After 10 years, the building value has now appreciated to $24.4 MM and the loan balance is $12 MM. The building is refinanced with a loan of $20 MM at a rate of 6%. The $8 MM of cash received is distributed equally to the 15 partners. The property is held under an LLC Partnership. Of the 15 partners, 10 invest the proceeds in accordance with IRS guidelines. The other 5 use the proceeds for personal purposes. As a result:

a) Those 10 investing will be able to deduct the incremental interest expense derived from the new, larger loan (assuming they receive sufficient interest and dividend gains to offset).b)Those 10 investing will not be able to deduct the incremental interest expense derived from the new, larger loan because the use of funds will not be shown in their tax returns.c) All partners will incur capital gains taxes on the debt-financed distributions when received.d) None of the partners will incur capital gains taxes on the debt-financed distributions when received.e) a & df) b & c

Revisit the scenario -

A medical practice has 14 partners, 10 of whom will invest equally to construct a 40,000 SF medical office building (MOB) at a total cost of $21MM. The annual triple-net rent will be set to produce an 8.00% Return on Investment ($1.68MM). There is no annual rent escalator. The as-complete appraised value is $20MM. The doctors secure a construction-to-permanent loan with the following terms:
- 12-month interest-only period followed by a 10-year term using a 25-year mortgage-style amortization
- Fixed-rate of 5.50% (contingent upon the building being owner-occupied by the practice)
- Personal joint and several guarantees of 125% pro-rata
- Debt approved at lesser of 80% loan-to-value (LTV) or loan-to-cost (LTC)
- Debt service coverage ratio of at least 1.20x post-distribution
10. A few years later, the practice has grown. There are now 20 partners in the practice and 16 owners in the real estate. Of those partners in the real estate, 5 plan to retire within the next 5 years. Soon after signing a new 10-year lease at market rates, the building owners look at the possibility of selling the real estate. After discussions with their broker, the owners are informed that they can receive a higher sales price if they a) increase their rents and b) increase the term of their lease. In addition to this, they are informed that, because of the sales multiple they would receive, this increased sales price would be greater than the increase in rent payments. If they decide to take the broker’s advice, which of the following is true?

a) All 20 practice partners benefit equally from the increase in value.b) All 16 owners of the real estate benefit equally from the increase in property value.c) Only the 4 partners that aren’t real estate owners would be disadvantaged.d) b & ce) None of the above

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10 Questions to Test Your Real Estate Knowledge