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Fina 210 > class 5 pp: Real Estate Debt Financing > Flashcards

class 5 pp: Real Estate Debt Financing Flashcards

1
Q

which step is this in the REI process?

A

developing a financial analysis

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2
Q

leverage effect

A

Adding leverage (financing) to an asset or company will act as a multiplier to the return generated by the asset or company

The greater the amount of leverage the greater the multiplicative effect

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3
Q

why do many investors add financing to their real estate assets

A

to obtain a higher returns

because of the leverage effect

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4
Q

how do you calculate return on equity without leverage?

A

(profits of sale + NOI - Interest) / (purchase price - loan)

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5
Q

Nominal or Loan Amount

A

principle balance due on the loan

i.e. the amount owed

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6
Q

maturity date

A

the date at which the loan is repaid in full

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7
Q

term

A

The period of time for which the loan is made

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8
Q

interest rate

A

percentage rate applied to the outstanding principal balance charged by the lender

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9
Q

fixed rate

A

interest rate set at the start of the loan

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10
Q

Variable or Floating Rate

A

interest rate is reset periodically

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11
Q

what is the difference between fixed rate and variable or floating rate

A

Variable rates are lower than fixed rates at the start of the loan but could increase beyond the initial fixed rate offered

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12
Q

Amortization Period

A

Period of time over which the scheduled capital repayments will reduce the loan to zero

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13
Q

what if the loan due does not have regular periodic payments of capital?

A

the borrower will be required to make a Balloon payment for the remaining principle balance at maturity

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14
Q

how does an amortization period benefit the lender?

A

reduces the risk of the lender over time

reduces reducing the amount of principle owed while maintaining the guarantee (mortgage asset)

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15
Q

in canada, what is the max length of an amortization period?

A

Generally no more than 25 years in Canada

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16
Q

debt service

A

the required periodic payments over a year

Includes both interest and required capital payments

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17
Q

call Interest Only or I.O. or non-amortizing loans

A

loans that do not require principal repayment prior to maturity

Payment is equal as interest, meaning there isn’t any capital payments

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18
Q

what are the type of term loans

A

Mortgage loans

Unsecured or corporate loans

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19
Q

mortgage loans

A

Guaranteed by the asset

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20
Q

types of mortgage loans

A

Recourse loans

Non-recourse loans

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21
Q

Unsecured or corporate loans

A

Secured only by the corporate credit and not one specific asset

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22
Q

Recourse loans

A

not only guaranteed by the mortgage on the property but also by a claim over the entity’s other assets

mans takes massive L if he cant pay back loan

this can greatly reduce the risk of a loan

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23
Q

Non-recourse loans

A

solely guaranteed by the property

If the borrower defaults and the value of the property is insufficient to recover the loan amount it is the lender which suffers the additional loss

24
Q

construction loans

A

Lender advances funds to pay for the construction costs as they are incurred, as opposed to one lump-sum

25
Q

construction draws or draw-downs

A

advances to fund construction costs

26
Q

when does a construction loan lender make his advances?

A

typically 6 months to 3 years prior to the costs that will be incurred

27
Q

interest capitalization

A

At the end of each month, the interest is not paid by the borrower, but added to the outstanding principal balance

in construction loan

28
Q

till when can a construction loan extend to?

A

to the period of time it takes to lease-up a property and stabilize its cash flows

29
Q

what are construction loans generally repaid from?

A

from the proceeds of sale of the property or from the proceeds of a term loan

30
Q

true or false

Construction loans are variable interest rate loans

A

true

31
Q

what are bridge loans used for?

A

Used to finance a property being repositioned in the market

32
Q

how long are bridge loans?

A

Typically short-term: 1 or 2 years

33
Q

what type of interest rate do bridge loans usually have?

A

Usually with a variable interest rate

34
Q

what does it mean for bridge loans if they command a higher interest rate?

A

riskier

35
Q

on which important metrics does the amount a lender will be willing to lend dependent on?

A

Loan to Value (LTV)

Debt Service Coverage Ratio (DSCR)

36
Q

Loan To Value Ratio (LTV)

A

measures the value of a loan against the value of the property

37
Q

what is the Loan To Value Ratio (LTV) used for?

A

used to ensure that the liquidation of the asset, if necessary, will generate enough cash to repay the loan

38
Q

how is the LTV calculated?

A

calculated by dividing the amount of the loan by the property value

39
Q

where do commercial real estate loan LTVs generally fall into?

A

generally fall into the 65% to 80% range

40
Q

Debt Service Coverage Ration (DSCR)

A

measures the property’s ability to generate enough cash (NOI) to make the required debt payments

41
Q

how do you calculate the Debt Service Coverage Ration (DSCR)

A

is calculated by dividing the NOI by the loan payment amount (capital and interest) for the year

42
Q

what does a DSCR of less than 1 indicate?

A

a negative cash flow

ex: a DSCR of .92 means that there is only enough NOI to cover 92% of annual debt service

43
Q

what doe commercial lenders usually look for in DCSRs?

A

DSCRs of at least 1.25 to ensure adequate cash flow

44
Q

what are non-financial risks that financial lenders also consider?

A

operational risks

tenant risks

45
Q

operational risks

A

Ability to lease at market rents

Security

Maintenance

HVACC

Services offered

46
Q

tenant risks

A

Quality of rent roll

Rollover risk

47
Q

what are Other risks to consider

A

Environmental risk

Legal risk

Physical asset risk

Liquidity risk

Market risk

Geographic risk

Other risks

48
Q

how is the interest rate of a corporate loan quoted?

A

on an Annual Percentage Rate basis

49
Q

how do you calculate the monthly interest rate of a corporate loan?

A

Monthly rate is the APR/12

ex: a loan with an APR of 12% would require monthly payments of interest of 1% (12%/12 months)

50
Q

how do you calculate the monthly interest rate of a mortgage loan?

A
  1. find the effective rate of the loan
  2. then find nominal rate of that same effective rate
  3. then divide by 12
51
Q

how do you find the effective rate of a mortgage loan?

A

divide the annual rate by 2 which gives two loans of same amoint

and then you find the effective rate corresponding to the two (so rate of the 2 combined)

ex: annual rate is 8%

effective rate will be 8.16%

52
Q

what do interest rates project?

A

reflect both the market and the project risk

53
Q

what does a higher interest rate mean?

A

The higher the perceived risk

54
Q

what type of fees can lenders also apply to increase the overall cost of the loan?

A

Application fees

Origination fees

Standby fees

55
Q

which lender expenses in underwriting or documenting the loan can also be charged?

A

Appraisal fees

Legal fees

56
Q

which fees can happen if you repay the loan early?

A

Prepayment penalty

Yield maintenance

Defeasance

Fina 210 (28 decks)

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