Financing

Question 1

Collateralized Loan Obligation

Answer 1

A security that is backed by a pool of loans. The security pays investors via payments received by the issuer from the underlying loans that make up the CLO. A typical CLO comprised of corporate debt last somewhere around 10 years while a CRE CLO lasts 2-4 years.

1) collateral manager secured financing through warehouse line or other financing.
2) issues security to investors
3) pays off warehouse line with proceeds. Any extra proceeds are used to buy additional loan assets.

Split into tranches based on risk.

Made up of bridge loans on properties in transitional phase such as renovation, expansion, or repositioning

Previously known as CDOs (collateralized debt obligations)

Question 2

Real Estate Mortgage Investment Conduit (Remic)

Answer 2

A special purpose vehicle used to pool mortgage loans and issue mortgage backed securities.

Pool loans based on risk and issue bonds or other securities to investors. They trade in secondary mortgage market.

Federally tax exempt entities but individuals are subject to individual income taxation

Owners can be limited if they want to improve property because of rules.

Question 3

Troubled Asset Relief Program (TARP)

Answer 3

Created during 2008 crisis To stabilize the countries financial system by buying mortgage back securities and bank stocks.

Invested $424.4 billion and recipes $441 billion in return

Used funds to Purchase stocks in banks, insurance companies, and auto makers, and to loan funds to financial institutions and homeowners

Question 4

Warehouse Lending

Answer 4

A line of credit Given to a loan originator. The funds are used to pay for a mortgage that a borrower uses to purchase property.

Banks can provide loans without using its own capital

The bank handles the application and approval of a loan and passes the funds from the warehouse lender to a creditor in the secondary market. The bank receives funds from the creditor to pay back to warehouse lender and profits by earning points and origination fees.

Short term

Question 5

Balance Sheet Investing

Answer 5

When an investor uses its own funds to invest in a real estate asset. This is in contrast to using 3rd party funds (when referring to equity) or securitization proceeds (when referring to debt).

Question 6

Breakup Fee

Answer 6

A fee paid to one party in a real estate transaction by a counter-party when the counter-party backs out of the transaction. The breakup fee is generally a percentage of the purchase price or mortgage loan amount and is used to compensate the damaged party for time and resources spent on the transaction.

Question 7

Cash out Refinance

Answer 7

The process by which a borrower takes out a new mortgage with sufficient loan proceeds to pay off the existing mortgage plus return all or part the borrower’s invested capital in the investment. The Cash-Out Refinance is sought by owners of real estate, because it provides them an opportunity to reduce their risk in the property while simultaneously freeing up capital to invest in new opportunities.

Question 8

Cash Sweep

Answer 8

The use of any free cash flow (after deducting debt service payments) to pay down an outstanding loan balance. In real estate, a cash sweep is often implemented by a lender when a borrower is unable to payoff the balloon balance upon loan maturity.

Question 9

Construction-Perm Loan

Answer 9

Also referred to as a “Rollover Loan”, a construction-perm loan is one that immediately converts into permanent debt financing once construction of the project is finalized

Question 10

Curtailment

Answer 10

A type of prepayment which reduces a mortgage loan’s outstanding principle balance. Curtailment can be done by either increasing one’s monthly payments or repaying a lump sum amount, both of which would shorten the loan maturity period.

Question 11

Debt Covenants

Answer 11

are essentially rules written into the loan documents which govern the behaviour of a borrower once the debt is issued. There are 2 general types of covenants which either permit (affirmative covenant) or restrict (negative covenant) the borrower’s ability to perform certain actions. Should the borrower break a covenant, the lender typically has the legal right to call back the loan (i.e. demand repayment).

Question 12

Debt Service Coverage Ratio

Answer 12

A financial metric used in real estate to measure a property’s ability to cover its debt obligations. The Debt Service Coverage Ratio (DSCR or DSC) is calculated by dividing the net operating income by the debt service payment and is often expressed as a multiple (i.e. a DSCR of 1.20x). The DSCR is used by banks to determine the maximum loan amount offered to a borrower and to assess the probability that a borrower might default on the loan.

Question 13

Debt Yield

Answer 13

The ratio of Net Operating Income (NOI) to the mortgage loan amount, expressed as a percentage. The debt yield is useful to lenders as it represents the lender’s return on cost were it to take ownership of the property. Among other metrics, lenders use debt yield to determine an appropriate loan amount.

Question 14

Defeasance

Answer 14

The process of releasing a borrower from its debt obligation (mortgage loan) and substituting the lien on the property with acceptable replacement collateral (typically treasury bonds). This replacement collateral is expected to generate a comparable substitute cash flow, which would otherwise be required on the existing debt were it not prepaid.

Question 15

Earn Out

Answer 15

A provision within a loan agreement that allows the borrower to receive additional funds from the lender upon completion of certain events (such as receiving a Certificate of Occupancy or surpassing pre-defined operating performance thresholds). Earn outs are structured using holdback agreements.

Question 16

Financing Memorandum

Answer 16

A request for mortgage financing given to lenders by commercial real estate borrowers (or their representatives) for the lenders’ investment consideration. The memorandum will typically highlight various terms and property specifics such as the borrower’s requested loan terms, a detailed description of the property, the location and relevant demographic trends, a financial summary, pictures, comparable sales and/or rentals, and any other information pertinent to the investment. The Financing Memorandum is similar to the Operating Memorandum in format and content, but the offering is for a real estate debt rather than equity investment.

Question 17

Good News Money

Answer 17

Additional funds paid out to the borrower by a mortgage lender upon the occurrence of certain “good news” events, such as the owner concluding a lease agreement with a major tenant in the building or reaching some pre-determined net operating income. Such additional funds are added to the outstanding loan balance and are generally subject to the same terms as the underlying loan.

Question 18

Bad Boy Guarantee

Answer 18

a guarantee provided by an individual or entity which covers the extent of the recourse liability arising from any non-recourse carve-out.

provides for personal liability against the borrower and principals of borrower upon the occurrence of certain enumerated bad acts committed by the borrower or its principals

Question 19

Interest Reserve

Answer 19

A reserve account held by the lender of a construction loan and used by the borrower to cover loan interest shortfalls during construction and lease-up. The interest reserve is funded via the initial proceeds from the construction loan, and is calculated based either on expected future draws or by means of a simple average estimate of the outstanding loan balance throughout the loan period.

Question 20

Jingle Mail

Answer 20

A colloquialism in real estate, a Jingle Mail is the letter a lender would receive containing a borrower’s keys (making a “jingle” sound as the keys bounced around). This situation typically occurs when there is a sharp decrease in the market value of property, such as occurred during the 2008 subprime mortgage crisis. Jingle Mail generally refers to a Deed in Lieu of Foreclosure and in many parts of the world is also called “giving back the keys.”

Question 21

Lock Out

Answer 21

A common clause in a CRE loan agreement. This is the period of time after disbursement that a borrower is not allowed to prepay the loan. Lenders will many times enforce a lock out period along with prepayment penalties after the lock out period as a way to ensure they are receiving earnings off the money they are responsible for disbursing.

Question 22

Springing Recourse

Answer 22

A form of loan guarantee only enforceable by a lender when certain default or credit events occur (e.g. if a borrower violates operating covenants, does not meet net worth requirements, files for voluntary bankruptcy, etc.). In springing recourse or springing liability, when such adverse events occur, the borrower’s guarantor (i.e. principal) becomes partially or fully liable for the loan obligation regardless of whether the loan is non-recourse or not.

Question 23

Takeout Loan

Answer 23

A type of permanent financing used to repay the proceeds owed on existing short-term debt (e.g a construction loan). Takeout loans are typically structured with longer terms, fixed payments and other structures commonly seen in permanent mortgage loans.