chapter 16: commercial mortgage types and decisions

Question 1

how long are commercial mortgages usually

Answer 1

3-10 years

Question 2

note in commercial

Answer 2

usually quite lengthy (in residential its quite simple) 
Provisions: amounts/timing of payments
penalties for late payments
record keeping
hazard insurance requirements
property maintenance
default

Question 3

what is the one asset a lender has for recourse

Answer 3

just the actual mortgaged property

-the borrower is shielded from personal liability

Question 4

credit “enhancement” to secure a loan

Answer 4

a guarantee by the organizer/sponsor of the investment to make the lender whole in the event the lender suffers a loss on the loan

Question 5

what creates security for the lenders

Answer 5

the mortgage

-due on sale clause

Question 6

balloon mortgage/loan

Answer 6

the most common instrument used to finance the acquisition of existing commercial property

• loan characterized by an amortization term that is longer than the loan term. bc the loan balance will not be zero at the end of the loan term, a balloon payment is necessary to pay off the remaining loan balance in full
• based on 25,30 year amort. schedules but the loan matures in 3-10 years

Question 7

the longer the loan term

Answer 7

the more risk for the lender

-mortgages rates increase the longer the term

Question 8

par value

Answer 8

the remaining loan balance on residential mortgages

- in commercial, you can’t prepay at par

Question 9

lockout provision

Answer 9

prohibits prepayment of the mortgage for a period of time after its origination

Question 10

reinvestment risk

Answer 10

the risk that lenders will need to reinvest the remaining loan balance at a lower rate when borrowers prepay mortgages with above market rates

Question 11

prepayment penalties

Answer 11

-some commercial mortgages have these in addition to lockout provisions

Question 12

yield maintenance agreement

Answer 12

the penalty that the borrowers pay depends on how far interest rates have declined since origination
-an alternative form of prepayment penalty

Question 13

defeasance clause

Answer 13

typically found in mortgages that are originated to become collateral for a commercial mortgage backed security. a borrower who prepays must purchase for the lender a set of US treasury securities whose coupon payments replace the mortgage cash flows the lender will lose as a result of the early retirement of the mortgage

Question 14

floating-rate mortgage

Answer 14

• adjustable interest rates
• the index is typically LIBOR
• can increase the default risk of a mortgage

Question 15

joint venture

Answer 15

produces a borrower-lender relationship in which a lender receives a portion of the cash flows from operation or sale of the property, as well as scheduled mortgage payments

• lender acquires ownership (equity) interest in the property
• many involve construction of new property
• reduces amount of equity capital the sponsor must contribute

Question 16

sale-leasebacks

Answer 16

an alternative vehicle for financing commercial property

• the borrower either currently owns or purchases the buildings or other improvements
• the other party purchases the land and leases it back to the owner

Question 17

second mortgage

Answer 17

secured by the borrower’s pledge of the property as collateral

• subordinate to the first mortgage in event of default or foreclosure
• the second mortgage lender is second in line to receive the sale proceeds from a foreclosure sale
• bc its more risky, these have an even higher interest rate

Question 18

mezzanine loans

Answer 18

similar to second mortgages except that such loans are not ensured by a lien on the property
-secured by the equity interests in the borrower’s company

Question 19

debt coverage ratio (DCR)

Answer 19

NOI/DS

net operating income/annual debt service

Question 20

what does the loan to value ratio measure

Answer 20

the percentage of the price encumbered by the first mortgage

-higher the ratio, less protection the lender has from loss of capital bc of default/foreclosure

Question 21

debt yield ratio

Answer 21

• replied on more than DCR to determine the max amount they are willing to lend to the borrower
  = NOI/Loan Amount

Question 22

financial risk

Answer 22

the risk that the NOI will be less than debt service

Question 23

correspondent relationship

Answer 23

a business relationship in which a permanent lender agrees to purchase loans or to consider loan requests from a mortgage banker or broker

Question 24

due diligence

Answer 24

after a buyer and seller have agreed on a purchase price, the buyer is provided time to verify the information that has been provided by the seller. “kicking the tires” before final closing

Question 25

loan commitment

Answer 25

a binding agreement between the lender and the borrower

Question 26

how long does it take a commercial loan to be processed

Answer 26

can take 90 days, but some can be 45 or less

Question 27

rate lock agreement

Answer 27

an agreement for the interest rate to stay whats it at, the buyer pays a fee for this
-if not then it goes up by points

Question 28

maximum debt service

Answer 28

NOI/Minimum DCR

Question 29

land acquisition loans

Answer 29

finance the purchase of raw land

Question 30

land development loans

Answer 30

finance the installation of the on-site and off-site improvements to the land

Question 31

construction loans

Answer 31

used to finance the costs associated with erecting the building(s)

Question 32

who is responsible for these loans

Answer 32

the developer

Question 33

miniperm loan

Answer 33

a single, short term permanent mortgage from a lender that provides financing for the construction period, the lease-up period, and for several years beyond the lease-up stage