DECK 1

Question 1

What is a RISK PREMIUM

Answer 1

The extra return above the risk-free rate that an investor needs in order to be compensated for the risk of a certain investment. It’s a measure of how much the potential investor needs to be compensated to take on the extra risk when compared to a risk-free investment; which is usually the US 10 year Treasury. The riskier the investment, the higher the return rate the investor needs to justify the risk.

Question 2

What is a BASIS POINT

Answer 2

.01% or put differently 1/100th of a percent
(used to clarify the spread (or difference) in interest rates)
Examples :
1 basis points (bps or bp) = .01%
5 bps = .05%
10 bps = .1%
100 bps = 1%
1000 bps= 10%
10000 bps = 100%

Question 3

What is I/O

Answer 3

Interest Only

Question 4

DEBT COVERAGE RATIO

Answer 4

The amount of cashflow leftover after paying the loan on the property (mortgage). DCR = NOI/Annual Debt
- This is usually the first thing the lender checks, often seeking a minimum of 1.20% with a target of 1.4 - 1.5 +
The higher the DCR the lower the down payment required.

Question 5

MULIT FAMILY - PRICE PER UNIT OR PRICE PER SQ. FT

Answer 5

sales price divided by # of apt. or units

- Allows you to gauge your offer (weighing it against the market comps to know if you’re getting a good deal).

Question 6

INTEREST ONLY PERIOD

Answer 6

Period during which borrower is only making payments on interest (and none on principal). Usually to ease burden during major construction periods.

Question 7

3 TYPES OF PREPAYMENT PENALTY

Answer 7

• 1) (% of loan amount)often done as a “step down amount” whereby each year closer to the original maturation date the lower the percentage.
• 2) (yield maintenance) current loan interest rate minus equivalent term US treasury rate. NPV of the inter rate difference = yield maintenance repayment penalty ( often most expensive option of the 3).
• 3) (defeasance clause) Allows borrower to substitute the real estate that’s being used as collateral with a portfolio of US treasuries that will generate the same debt service.

Question 8

FLOATING RATE DEBT

Answer 8

The interest rate will go up or down based on a pre determined Index . Most often used : 30 Day LIBOR (London Interbank Offered Rate) Index

Question 9

INTEREST RATE SPREAD

Answer 9

(Or Term Spread) represents the difference between the long term interest rates and short-term interest rates on debt instruments such as bonds.

The difference is also known as the slope of the bond yield curve (which is a graph that plots the interest rates (or coupons) of bonds of equal quality, but different maturity dates, at a specified point in time).

The greater the slope of the curve, the greater the term spread. If the term spread is positive the long term rates are higher than the short term rates at that point in time.

Whereas a negative term spread indicates that the yield curve is inverted and the short term rates are higher than the long-term rates.

Question 10

GOOD NEWS MONEY

Answer 10

Additional loan proceeds the lender agrees to give you if you sign a new lease at the property. The additional proceeds can pay for things like :
- TI allowances
- leasing commissions
It prevents the borrower from having to go out of pocket for new lease related expenses. It’s worth it to the lender because new leases increase the NOI which therefore increase the value of the property.

Question 11

LOCK OUT PERIOD

Answer 11

A Time period where lendee is not able to prepay the loan at all.