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RE 3095 > Module 8 > Flashcards

Module 8 Flashcards

1
Q

According to mortgage industry segmentation, what are the two types of industries that residential real estate deals with?

A

Government-insured and conventional

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2
Q

According to mortgage industry segmentation, what are the two types of industries that commercial real estate deals with?

A

Permanent and Acquisition, development, construction (ADC)

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3
Q

What do permanent commercial real estate loans require?

A

Properties with stabilized income

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4
Q

What is the intent of portfolio-based permanent loans?

A

To hold onto the property

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5
Q

How do portfolio-based permanent loans make money?

A

They earn a profit on payments

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6
Q

What is the intent of conduit-based permanent loans?

A

To distribute as a commercial mortgage-backed security

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7
Q

What is the typical maturity of permanent loans?

A

5 to 15 years

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8
Q

What is the amortization of permanent loans?

A

Interest-only or partially amortizing (balloon payment)

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9
Q

What is the assignment of money of permanent loan leases if default occurs?

A

Tenant payments are automatically given to the lender if the mortgagor defaults

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10
Q

What is the bad boy recourse clause in permanent loans?

A

If the borrower acts in good faith then there is no personal liability rather only the LLC can be attacked

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11
Q

Underwriting which type of loan is easier? Why is that?

A

Residential loans. They are pretty similar unlike commercial loans which are very different and harder to value

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12
Q

What is a lockout prepayment clause in permanent loans?

A

A period when you are not allowed to prepay a loan

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13
Q

In permanent loans, there can be a clause where the lender must be…

A

Periodically supplied with NOI and cash flows

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14
Q

With ADC loans additional _ as well as _ of lender is required

A

Expertise, Supervision

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15
Q

What happens during ADC loans?

A

The release of funds is monitored and based on benchmarks

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16
Q

What is the typical maturity of an ADC loan?

A

1 to 2 years

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17
Q

What is the amortization of ADC loans?

A

There is none or there is negative amortization (meaning there are no payments)

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18
Q

If recourse is required in ADC loans…

A

The lender can pursue the real estate company to get their money back

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19
Q

What is a stand-by commitment in an ADC loan?

A

An agreement with a permanent lender to make a loan when the property’s NOI is stabilized

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20
Q

Default is more common in _ real estate

A

Commercial

21
Q

When underwriting a commercial real estate loan (just like in residential real estate) it is necessary to focus on _

A

Cost, collateral, and capacity (the 3 C’s)

22
Q

What are the factors of market analysis in underwriting commercial real estate?

A

Analyze the strength of the firm & economy, and project rents & vacancy rates in order to calculate NOI

23
Q

What is the typical length of a commercial real estate lease?

A

3 to 7 years

24
Q

What are common concessions in commercial real estate?

A

Free rent for some time, and tenant improvements

25
Q

What is a unique factor of operating expenses in commercial real estate?

A

They range from gross to triple-net leases

26
Q

What are the three common underwriting ratios?

A

Debt Service Coverage Ratio, Break-Even Ratio, and Debt-Yield Ratio

27
Q

How do you calculate the Debt Service Coverage Ratio?

A

NOI/Debt Service

28
Q

What do you want to see when you calculate the Debt Service Coverage Ratio?

A

For it to be as high as possible because you want NOI to be much higher than the debt service

29
Q

What is the conventional threshold for the debt service coverage ratio?

A

120%

30
Q

What does the debt service coverage ratio try to capture?

A

How easily the tenant should be able to make a payment

31
Q

How do you calculate the Break-Even Ratio?

A

(Debt Service + Operating Expenses) / PGI

32
Q

What does the break-even ratio do?

A

Find the minimum occupancy rate needed to cover the debt service

33
Q

What do you want to see with the break-even ratio?

A

The lower the better and it should be no higher than 80%

34
Q

How is the debt-yield ratio calculated?

A

NOI / Loan amount

35
Q

What does the debt-yield ratio show?

A

The COC returns to the primary lender if the property immediately defaults

36
Q

How does the debt-yield ratio typically look at the loan?

A

As if the banker owns the financial asset and is generating income

37
Q

What does the debt-yield ratio purposely ignore?

A

Cap rates, interest rates, and amortization in order to be more transparent

38
Q

What do you want to see with the debt-yield ratio?

A

The higher the percentage the better

39
Q

What is usually the minimum acceptable percentage with the debt-yield ratio?

A

10%

40
Q

What are the reasons for using debt with commercial real estate?

A

Insufficient funds, Diversification and to magnify returns to equity

41
Q

What are the reasons surrounding insufficient funds in commercial real estate?

A

Superior management capabilities (human capital), and the asset could not be purchased without additional funds

42
Q

What is the reason for diversification in commercial real estate?

A

To spread risk between investments, and to get income from 5 buildings rather than 1

43
Q

What is the deal with magnified returns to equity in commercial real estate?

A

The ability to leverage return to investment and increase the variability of returns

44
Q

When does positive leverage occur?

A

Effective borrowing cost of loan < opportunity cost of equity

45
Q

With positive leverage, the return of the property is often used as an _

A

The opportunity cost for other investments

46
Q

The basic idea of positive leverage is to _

A

Increase the loan principal until the incremental (marginal) cost of debt is equal to the marginal cost of equity

47
Q

In commercial real estate, a lender needs to consider _

A

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

48
Q

What are the three ways to increase leverage?

A

Increase principal of loan from primary lender, seek a second or subordinate mortgage loan, and seek mezz (annine) deby

RE 3095 (4 decks)

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