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Fina 210 > chapter 7 book: property finance: DEBT > Flashcards

chapter 7 book: property finance: DEBT Flashcards

1
Q

permanenent loans

A

made on properties that generate stable stream of cash

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2
Q

who looks for home mortgages?

A

made to borrowers seeking to purchase primary residences or for vacation homes

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3
Q

what is the difference between home mortgages and commercial property loans?

A

Unlike commercial mortgages, the lender making a home mortgage looks solely to the credit of the borrower to repay the mortgage

in commercial properties, the lender expects that the property will generate cash flow to support the required debt payments

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4
Q

what are construction loans used for?

A

specifically structured to meet the needs of borrowers who are going to build a property

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5
Q

what is the period of time in which one should pay back construction loans?

A

borrowers must pay for the ongoing costs of construction over a period of time, typically between six months and three years

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6
Q

why is the issuer of a construction loan at risk?

A

While a property is under construction, it does not generate any revenue stream

collateral consists of an unfinished property, without tenants, that is not generating any income

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7
Q

what has been the solution to the risks of issuing construction loans?

A

lenders advance funds to pay for construction costs as they are incurred rather than loaning a lump sum

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8
Q

construction draws

A

funds to pay for construction costs as they are incurred

added to the loan balance when they are paid

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9
Q

mini perm construction loan

A

post completion loan period lasting one to two years

during which the owner can bring the property to stabilization and improve its value before seeking permanent financing

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10
Q

why would one seek a mini perm construction loan?

A

In the event that the borrower believes it will need time after completion to bring the property up to its full cash flow potential

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11
Q

Construction Loan Guarantee

A

principal guarantee

getting the full completed house

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12
Q

principal guarantee

A

guarantee the repayment of part or all of the loan amount of a construction loan

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13
Q

land loans

A

When security for a loan is limited to an interest in land

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14
Q

what are the challenges presented by land loans?

A

it does not generate any cash flow.

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15
Q

condo loans

A

loans to build condos

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16
Q

what are the benefits of condo loans?

A

allows the borrower to make a partial repayment of the loan each time a unit is sold

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17
Q

end loans

A

condo loans that earn additional fees by offering financing to the condo buyers

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18
Q

what is the major risk with condo loans?

A

condos do not sell in a timely manner

the developer cannot support the expenses of a building full of vacant units

the developer cannot support the debt service on the unsold unit inventory

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19
Q

bridge loans

A

Bridge loans are typically short-term, floating-rate loans held on the balance sheet of the originating lender

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20
Q

why use bridge loans?

A

Properties that are in transition require more flexible financing than mature, stabilized assets

need financing before assessing and repositioning an asset

seeking short-term financing from a real estate lender who is experienced in analyzing properties in transition and has capital that is open to a higher level of risk in return for higher interest rates

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21
Q

Unsecured Loans

A

financing only secured by corporate credit

not secured by asset

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22
Q

which are the first determinants of the purpose of the type of loan required?

A

The type of asset and the purpose of the loan

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23
Q

Nominal Amount

A

he principal balance due on the loan

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24
Q

maturity

A

The date at which a loan is repaid in full is its maturity

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25
Q

term of the loan

A

The period of time during which a loan is outstanding

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26
Q

interest rate

A

the bank’s charge to the borrower for using its funds

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27
Q

to what is the interest rate applied to

A

applied to the nominal amount outstanding under the loan

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28
Q

fixed rate mortgage

A

he interest rate is set at the inception of the loan and is not subject to adjustment

29
Q

Adjustable or variable-rate mortgages

A

interest rates that are reset periodically to reflect changes in the financial markets

30
Q

how do you calculate the interest due?

A

Interest Due = principal balance · interest Rate

principal balance = amount outstanding

interest rate = annual rate

31
Q

debt service

A

the required periodic payment to the lender as set forth in the loan document

includes interest currently payable as well as any amount required for repayment of principal

32
Q

when is mortgage said to have level debt service?

A

If the sum of interest and principal due each month is constant

33
Q

interest only loan

A

debt service consists solely of the interest due

does not require the periodic payment of principal

34
Q

how do you calculate debt service?

A

debt service = interest due + principal due

35
Q

amortizing loan

A

When a loan calls for the periodic repayment of a portion of the outstanding principal

36
Q

fully amortizing loan

A

If the scheduled payments of principal during the term of the loan result in the full repayment of principal coincident with maturity

37
Q

final balloon payments

A

If the loan does not require periodic amortization

or

the scheduled amortization payments total less than the amount outstanding

the borrower will be required to make a final payment of the remaining outstanding principal at maturity

38
Q

what is the goal of loan amortization’

A

reduces a lender’s risk over time

matches the hypothetical depreciation occurring in the value of property over time

still maintains a constant loan-to-value ratio (LTV)

39
Q

why do LTV ratios fall during the life of most amortizing loans?

A

real estate values have risen over time faster than the physical properties have deteriorated

40
Q

residual amount of debt service

A

the amount remaining that is subtracted from outstanding loan balance

it is the remaining amount if the debt service payment is larger than interest due that month

41
Q

every month of an amortizing loan, does the residual increase or decrease?

why?

A

it increases

payments stay the same, but interest on outstanding balance falls

42
Q

why do commercial borrowers like longer amortization schedules?

A

because they reduce the monthly debt service required on each dollar borrowed

43
Q

bullet amortization

A

the frequency of principal payments can be annual or semiannual

the interest remains due monthly

44
Q

negative amortization

A

The buildup of principal over time

45
Q

mortgage constant

A

amount of constant debt service paid each month measured as a percentage of the initial loan amount

46
Q

covenants

A

promises made by the borrower to the lender

may cover both financial and operational aspects of the property

47
Q

what does the type of covenant depend on?

A

depend on the halo rings

depend on the type of security for the loan

48
Q

what will covenants relate to if the loan is secured by a particular asset?

A

covenants will relate to the financial performance and operation of that asset

49
Q

what do financial covenants usually require?

A

may require the property to meet a required level of debt service coverage

50
Q

when is a loan said to be in default?

A

In the event that the borrower fails to meet the agreed-upon covenants, or fails to pay the amounts due on the loan

51
Q

monetary default

A

If the borrower does not pay the principal and interest on time

52
Q

technical default

A

If the borrower breaches a covenant that does not involve payment of the loan

53
Q

cure period

A

short period of time in which the borrower can remedy the default, and bring the loan back into good standing

54
Q

workout

A

negotiating a restructure of the loan prior to acceleration

55
Q

acceleration

A

brings forward the maturity of the loan and requires the borrower to immediately repay the outstanding balance and any penalties

happens when the borrower is unable to restore the loan to good standing after a cure period

56
Q

on which two metrics is the amount of money that a lender will advance to a borrower dependent on?

A

loan-to-value and debt service coverage

57
Q

The loan-to-value ratio

A

also known as the leverage ratio

the relationship between the loan amount and the market value of the property expressed as a percentage

measured over the course of a year

58
Q

why use the loan-to-value ratio?

A

to determine whether the liquidation of the asset will provide enough cash to repay the loan

59
Q

whats does the debt service coverage ratio (DSCR) measure?

A

measures the property’s cash flow as a multiple of the required cash payments necessary to pay the mortgage

measured over the course of a year

60
Q

why use the debt service coverage ratio (DSCR)?

A

to determine whether the property is generating enough cash to allow the borrower to pay the required monthly loan payments

or ti find out if there is a risk of default

61
Q

what LTV ratios should we want?

A

up to 65% and 75% in periods of easy credit

62
Q

what DCSR ratios should we want?

A

minimum 1.25

1.10 minimum in periods of easy credit

63
Q

no-income verification loans

A

giving mortgage loans to borrowers with lack of verifiable income

64
Q

subprime loans

A

The classes of loans that do not meet traditional underwriting standards at the time of their origination

65
Q

points

A

an up- front payment equal to a set percentage of the amount to be borrowed

additional interest

66
Q

processing fees

A

amount paid to lenders for their work in the initial underwriting of a loan and then for administering the mortgage over its life

67
Q

sponsorship

A

the ownership group that is borrowing the money to finance the asset

68
Q

quality of real estate

A

strength of the current tenants and the terms of their leases

Fina 210 (28 decks)

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