Module 8 Flashcards
According to mortgage industry segmentation, what are the two types of industries that residential real estate deals with?
Government-insured and conventional
According to mortgage industry segmentation, what are the two types of industries that commercial real estate deals with?
Permanent and Acquisition, development, construction (ADC)
What do permanent commercial real estate loans require?
Properties with stabilized income
What is the intent of portfolio-based permanent loans?
To hold onto the property
How do portfolio-based permanent loans make money?
They earn a profit on payments
What is the intent of conduit-based permanent loans?
To distribute as a commercial mortgage-backed security
What is the typical maturity of permanent loans?
5 to 15 years
What is the amortization of permanent loans?
Interest-only or partially amortizing (balloon payment)
What is the assignment of money of permanent loan leases if default occurs?
Tenant payments are automatically given to the lender if the mortgagor defaults
What is the bad boy recourse clause in permanent loans?
If the borrower acts in good faith then there is no personal liability rather only the LLC can be attacked
Underwriting which type of loan is easier? Why is that?
Residential loans. They are pretty similar unlike commercial loans which are very different and harder to value
What is a lockout prepayment clause in permanent loans?
A period when you are not allowed to prepay a loan
In permanent loans, there can be a clause where the lender must be…
Periodically supplied with NOI and cash flows
With ADC loans additional _ as well as _ of lender is required
Expertise, Supervision
What happens during ADC loans?
The release of funds is monitored and based on benchmarks
What is the typical maturity of an ADC loan?
1 to 2 years
What is the amortization of ADC loans?
There is none or there is negative amortization (meaning there are no payments)
If recourse is required in ADC loans…
The lender can pursue the real estate company to get their money back
What is a stand-by commitment in an ADC loan?
An agreement with a permanent lender to make a loan when the property’s NOI is stabilized
Default is more common in _ real estate
Commercial
When underwriting a commercial real estate loan (just like in residential real estate) it is necessary to focus on _
Cost, collateral, and capacity (the 3 C’s)
What are the factors of market analysis in underwriting commercial real estate?
Analyze the strength of the firm & economy, and project rents & vacancy rates in order to calculate NOI
What is the typical length of a commercial real estate lease?
3 to 7 years
What are common concessions in commercial real estate?
Free rent for some time, and tenant improvements
What is a unique factor of operating expenses in commercial real estate?
They range from gross to triple-net leases
What are the three common underwriting ratios?
Debt Service Coverage Ratio, Break-Even Ratio, and Debt-Yield Ratio
How do you calculate the Debt Service Coverage Ratio?
NOI/Debt Service
What do you want to see when you calculate the Debt Service Coverage Ratio?
For it to be as high as possible because you want NOI to be much higher than the debt service
What is the conventional threshold for the debt service coverage ratio?
120%
What does the debt service coverage ratio try to capture?
How easily the tenant should be able to make a payment
How do you calculate the Break-Even Ratio?
(Debt Service + Operating Expenses) / PGI
What does the break-even ratio do?
Find the minimum occupancy rate needed to cover the debt service
What do you want to see with the break-even ratio?
The lower the better and it should be no higher than 80%
How is the debt-yield ratio calculated?
NOI / Loan amount
What does the debt-yield ratio show?
The COC returns to the primary lender if the property immediately defaults
How does the debt-yield ratio typically look at the loan?
As if the banker owns the financial asset and is generating income
What does the debt-yield ratio purposely ignore?
Cap rates, interest rates, and amortization in order to be more transparent
What do you want to see with the debt-yield ratio?
The higher the percentage the better
What is usually the minimum acceptable percentage with the debt-yield ratio?
10%
What are the reasons for using debt with commercial real estate?
Insufficient funds, Diversification and to magnify returns to equity
What are the reasons surrounding insufficient funds in commercial real estate?
Superior management capabilities (human capital), and the asset could not be purchased without additional funds
What is the reason for diversification in commercial real estate?
To spread risk between investments, and to get income from 5 buildings rather than 1
What is the deal with magnified returns to equity in commercial real estate?
The ability to leverage return to investment and increase the variability of returns
When does positive leverage occur?
Effective borrowing cost of loan < opportunity cost of equity
With positive leverage, the return of the property is often used as an _
The opportunity cost for other investments
The basic idea of positive leverage is to _
Increase the loan principal until the incremental (marginal) cost of debt is equal to the marginal cost of equity
In commercial real estate, a lender needs to consider _
They are exposed to more default risk as LTV increases, to charge higher interest rates proportional to risk, and to define “bins” of rates based on minimum underwriting standards
What are the three ways to increase leverage?
Increase principal of loan from primary lender, seek a second or subordinate mortgage loan, and seek mezz (annine) deby
