Chapter 8: Brokering Specialization

Question 1

EBITDA

Answer 1

earning before interest, taxes (income) , depreciation and amortization

Question 2

Debt service coverage rato

(3)

Answer 2

ratio of cash available for debt servicing to interest, principal and lease payments. It is a popular benchmark used in the measurement of an entity’s (person or corporation) ability to produce enough cash to cover its debt (including lease) payments.

• high ratio, easier it is to obtain low
• less than 1 means negative cash flow

Question 3

What is used in calculating the Net Operating Income?

Answer 3

Gross Potential Revenue + Other Income - Vacancy and Bad Debt Allowance = Gross Realized Revenue (also called Effective Gross Income) - Operating Expenses (paid by landlord) = Net Operating Income

NOI / payment = EBITDA

Question 4

How to estimate market value

Answer 4

I/R = V

I = net operating income
R = rate of return
V = value of price

Question 5

What is an environmental assessment and when is it required?

(4)

Answer 5

An investigation in relation to land to determine the environmental condition of property and includes a phase one environmental site assessment and may include a phase two environmental site assessment.
Required whenever there may be concern about contamination of land

• phase 1: information search
• phase 2: sampling and testing
• phase 3: assessmenet of information gathers in Phase 1 and 2

Question 6

Private lenders can typically expect a _____ far in excess of tradition investment

Answer 6

• private lenders can typically expect a rate of return far in excess of tradition investment

Question 7

Challenges for private lending

(4)

Answer 7

• assessing the risk
• significant capital outlay
• reinvestment of return
• lack of liquidity

Question 8

Syndicated mortgage investment

Answer 8

another option for private lender is to invest in a single mortgage with other private lenders

Question 9

Qualified syndicated mortgage (QSMI)

Answer 9

arrange by a mortgage brokerage

Question 10

Non-Quaified syndicated mortgage

Answer 10

regulated by FSRA and Ontario Securities Commission

Question 11

Difference between permitted clients and non permitted clients

Answer 11

• Permitted clients: individuals that are presumed to have significant experience regarding financial matters
• Non permitted clients: financial institutions, regulated pension plan, or government

Question 12

Mortgage Backed securities (MBS)

Answer 12

pool of amortized residential mortgages insured through CMHC under the National Housing Act

Question 13

Mortgage Investment Corporation (MIC)

Answer 13

corporation that enables small investors to invest in a diversified pool of mortgages on residential real estate with the benefit of using the corporate form by purchasing shares in the corporation

Question 14

Define ICI.

Answer 14

ICI (industrial, commercial, investment), often just referred to as commercial

Question 15

List the six main differences between residential and commercial transactions.

Answer 15

Property
Income
Appraisal
Environmental Site Assessment
Lenders
Timing

Question 16

What is a typical rate of return in a private mortgage?

Answer 16

For a first mortgage, a private lender will traditionally charge in excess of 7% interest, and as high as 9% interest, while on a second mortgage interest rates of 13% and higher are typical, making second mortgages the vehicle of choice among most private lenders

Question 17

What is a mortgage-backed security?

Answer 17

A mortgage-backed security is an investment in a pool of amortized residential mortgages insured through CMHC under the National Housing Act (NHA).

Question 18

. Does a MIC share the same type of liquidity issue as a private mortgage? Why or why not?

Answer 18

Yes, because selling shares back to the corporation requires the corporation’s approval, which may or may not be provided, based on the subscription agreement