chapter 7 book: property finance: DEBT Flashcards
permanenent loans
made on properties that generate stable stream of cash
who looks for home mortgages?
made to borrowers seeking to purchase primary residences or for vacation homes
what is the difference between home mortgages and commercial property loans?
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
what are construction loans used for?
specifically structured to meet the needs of borrowers who are going to build a property
what is the period of time in which one should pay back construction loans?
borrowers must pay for the ongoing costs of construction over a period of time, typically between six months and three years
why is the issuer of a construction loan at risk?
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
what has been the solution to the risks of issuing construction loans?
lenders advance funds to pay for construction costs as they are incurred rather than loaning a lump sum
construction draws
funds to pay for construction costs as they are incurred
added to the loan balance when they are paid
mini perm construction loan
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
why would one seek a mini perm construction loan?
In the event that the borrower believes it will need time after completion to bring the property up to its full cash flow potential
Construction Loan Guarantee
principal guarantee
getting the full completed house
principal guarantee
guarantee the repayment of part or all of the loan amount of a construction loan
land loans
When security for a loan is limited to an interest in land
what are the challenges presented by land loans?
it does not generate any cash flow.
condo loans
loans to build condos
what are the benefits of condo loans?
allows the borrower to make a partial repayment of the loan each time a unit is sold
end loans
condo loans that earn additional fees by offering financing to the condo buyers
what is the major risk with condo loans?
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
bridge loans
Bridge loans are typically short-term, floating-rate loans held on the balance sheet of the originating lender
why use bridge loans?
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
Unsecured Loans
financing only secured by corporate credit
not secured by asset
which are the first determinants of the purpose of the type of loan required?
The type of asset and the purpose of the loan
Nominal Amount
he principal balance due on the loan
maturity
The date at which a loan is repaid in full is its maturity
term of the loan
The period of time during which a loan is outstanding
interest rate
the bank’s charge to the borrower for using its funds
to what is the interest rate applied to
applied to the nominal amount outstanding under the loan
fixed rate mortgage
he interest rate is set at the inception of the loan and is not subject to adjustment
Adjustable or variable-rate mortgages
interest rates that are reset periodically to reflect changes in the financial markets
how do you calculate the interest due?
Interest Due = principal balance · interest Rate
principal balance = amount outstanding
interest rate = annual rate
debt service
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
when is mortgage said to have level debt service?
If the sum of interest and principal due each month is constant
interest only loan
debt service consists solely of the interest due
does not require the periodic payment of principal
how do you calculate debt service?
debt service = interest due + principal due
amortizing loan
When a loan calls for the periodic repayment of a portion of the outstanding principal
fully amortizing loan
If the scheduled payments of principal during the term of the loan result in the full repayment of principal coincident with maturity
final balloon payments
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
what is the goal of loan amortization’
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)
why do LTV ratios fall during the life of most amortizing loans?
real estate values have risen over time faster than the physical properties have deteriorated
residual amount of debt service
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
every month of an amortizing loan, does the residual increase or decrease?
why?
it increases
payments stay the same, but interest on outstanding balance falls
why do commercial borrowers like longer amortization schedules?
because they reduce the monthly debt service required on each dollar borrowed
bullet amortization
the frequency of principal payments can be annual or semiannual
the interest remains due monthly
negative amortization
The buildup of principal over time
mortgage constant
amount of constant debt service paid each month measured as a percentage of the initial loan amount
covenants
promises made by the borrower to the lender
may cover both financial and operational aspects of the property
what does the type of covenant depend on?
depend on the halo rings
depend on the type of security for the loan
what will covenants relate to if the loan is secured by a particular asset?
covenants will relate to the financial performance and operation of that asset
what do financial covenants usually require?
may require the property to meet a required level of debt service coverage
when is a loan said to be in default?
In the event that the borrower fails to meet the agreed-upon covenants, or fails to pay the amounts due on the loan
monetary default
If the borrower does not pay the principal and interest on time
technical default
If the borrower breaches a covenant that does not involve payment of the loan
cure period
short period of time in which the borrower can remedy the default, and bring the loan back into good standing
workout
negotiating a restructure of the loan prior to acceleration
acceleration
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
on which two metrics is the amount of money that a lender will advance to a borrower dependent on?
loan-to-value and debt service coverage
The loan-to-value ratio
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
why use the loan-to-value ratio?
to determine whether the liquidation of the asset will provide enough cash to repay the loan
whats does the debt service coverage ratio (DSCR) measure?
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
why use the debt service coverage ratio (DSCR)?
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
what LTV ratios should we want?
up to 65% and 75% in periods of easy credit
what DCSR ratios should we want?
minimum 1.25
1.10 minimum in periods of easy credit
no-income verification loans
giving mortgage loans to borrowers with lack of verifiable income
subprime loans
The classes of loans that do not meet traditional underwriting standards at the time of their origination
points
an up- front payment equal to a set percentage of the amount to be borrowed
additional interest
processing fees
amount paid to lenders for their work in the initial underwriting of a loan and then for administering the mortgage over its life
sponsorship
the ownership group that is borrowing the money to finance the asset
quality of real estate
strength of the current tenants and the terms of their leases
