AI Real Estate L2

Question 1

mortgage

Answer 1

the collateral, i.e. a house, an office or a shopping center

–> not a loan in the common sense

Question 2

Loan to value ratio

Answer 2

outstanding loan balance/ estimated value of the collateral

Question 3

Loan to income ratio

Answer 3

outstanding loan balance / income (net, gross)

Question 4

Debt service ratio

Answer 4

net mortgage payments / income (net, gross)

Question 5

net mortgage payment

Answer 5

(with interest factored in in comparison to outstanding loan balance)

Question 6

Why use debt in real estate?

Answer 6

• higher diversification due to higher amount of assets (building a portfolio)
• there is collateral, liquidity enhancing (real estate asset may not easily sold; instead investors can re-mortgage)
• Since the collateral in real estate is more tangible and liquid than the normal fixed/variable asset of a firms, generally distress costs tend to matter less; hence, more options to use debt-financing

Question 7

Remortgage

Answer 7

A remortgage (known as refinancing in the United States) is the process of paying off one mortgage with the proceeds from a new mortgage using the same property as security.

Question 8

Mezzanine loans:

Answer 8

are collateralized by the stock of the development company rather than the developed property itself (as would be the case with a traditional mortgage). This allows the lender to engage in a more rapid seizure of underlying collateral in the event of default and foreclosure.
Used to cover the gap between the mortgage (collateralized bank loan) and available equity

Question 9

Differentiated equity partner

Answer 9

often as partners in a project, there are ‘money providers’ and entrepreneurial partners. The returns of the project will be divided amongst partners on a pro rata pari passu basis. I.e. proportional on their capital contributions up to a certain hurdle; excess return above this level will be split between the ‘money providers’ and entrepreneurial partners

Question 10

Coverage Ratio

Answer 10

Interest Coverage Ratio=
Interest Expense/EBIT

A coverage ratio, broadly, is a group of measures of a company’s ability to service its debt and meet its financial obligations such as interests payments or dividends.

Question 11

How much will most lenders loan up to?

Answer 11

up to 75%. For loans under 2 million a few lenders will go to 80 or 90%

Question 12

How high must the debt service coverage be for a loan?

Answer 12

at least 1.25 times the mortgage payment

Question 13

What is the normal term for a mortgage contract?

Answer 13

5,10,15 years

Question 14

What is real estate good for according to the investors assessment?

Answer 14

Inflation protection is quite good

Question 15

What is real estate bad for according to the investors assessment?

Answer 15

• low liquidity
• growth low
• time horizon long
• high expertise needed

Question 16

To qualify as a REIT a company must

Answer 16

• Invest at least 75% of its total assets in real estate
• Derive at least 75% of its gross income from rents from real property,
interest on mortgages financing real property or from sales of real estate
• Pay at least 90% of its taxable income in the form of shareholder dividends each year
• Be an entity that is taxable as a corporation
• Be managed by a board of directors or trustees
• Have a minimum of 100 shareholders
• Have no more than 50% of its shares held by five or fewer individuals

Question 17

Was performance better in direct or indirect real estate?

Answer 17

Better in indirect real estate

Question 18

CMBS

Answer 18

A commercial mortgage-backed security (CMBS) is a fixed-income security, typically in the form of a bond, which uses commercial real estate loans as collateral.