Module 8

Question 1

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

Answer 1

Government-insured and conventional

Question 2

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

Answer 2

Permanent and Acquisition, development, construction (ADC)

Question 3

What do permanent commercial real estate loans require?

Answer 3

Properties with stabilized income

Question 4

What is the intent of portfolio-based permanent loans?

Answer 4

To hold onto the property

Question 5

How do portfolio-based permanent loans make money?

Answer 5

They earn a profit on payments

Question 6

What is the intent of conduit-based permanent loans?

Answer 6

To distribute as a commercial mortgage-backed security

Question 7

What is the typical maturity of permanent loans?

Answer 7

5 to 15 years

Question 8

What is the amortization of permanent loans?

Answer 8

Interest-only or partially amortizing (balloon payment)

Question 9

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

Answer 9

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

Question 10

What is the bad boy recourse clause in permanent loans?

Answer 10

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

Question 11

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

Answer 11

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

Question 12

What is a lockout prepayment clause in permanent loans?

Answer 12

A period when you are not allowed to prepay a loan

Question 13

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

Answer 13

Periodically supplied with NOI and cash flows

Question 14

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

Answer 14

Expertise, Supervision

Question 15

What happens during ADC loans?

Answer 15

The release of funds is monitored and based on benchmarks

Question 16

What is the typical maturity of an ADC loan?

Answer 16

1 to 2 years

Question 17

What is the amortization of ADC loans?

Answer 17

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

Question 18

If recourse is required in ADC loans…

Answer 18

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

Question 19

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

Answer 19

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

Question 20

Default is more common in _ real estate

Answer 20

Commercial

Question 21

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

Answer 21

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

Question 22

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

Answer 22

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

Question 23

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

Answer 23

3 to 7 years

Question 24

What are common concessions in commercial real estate?

Answer 24

Free rent for some time, and tenant improvements

Question 25

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

Answer 25

They range from gross to triple-net leases

Question 26

What are the three common underwriting ratios?

Answer 26

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

Question 27

How do you calculate the Debt Service Coverage Ratio?

Answer 27

NOI/Debt Service

Question 28

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

Answer 28

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

Question 29

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

Answer 29

120%

Question 30

What does the debt service coverage ratio try to capture?

Answer 30

How easily the tenant should be able to make a payment

Question 31

How do you calculate the Break-Even Ratio?

Answer 31

(Debt Service + Operating Expenses) / PGI

Question 32

What does the break-even ratio do?

Answer 32

Find the minimum occupancy rate needed to cover the debt service

Question 33

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

Answer 33

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

Question 34

How is the debt-yield ratio calculated?

Answer 34

NOI / Loan amount

Question 35

What does the debt-yield ratio show?

Answer 35

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

Question 36

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

Answer 36

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

Question 37

What does the debt-yield ratio purposely ignore?

Answer 37

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

Question 38

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

Answer 38

The higher the percentage the better

Question 39

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

Answer 39

10%

Question 40

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

Answer 40

Insufficient funds, Diversification and to magnify returns to equity

Question 41

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

Answer 41

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

Question 42

What is the reason for diversification in commercial real estate?

Answer 42

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

Question 43

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

Answer 43

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

Question 44

When does positive leverage occur?

Answer 44

Effective borrowing cost of loan < opportunity cost of equity

Question 45

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

Answer 45

The opportunity cost for other investments

Question 46

The basic idea of positive leverage is to _

Answer 46

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

Question 47

In commercial real estate, a lender needs to consider _

Answer 47

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

Question 48

What are the three ways to increase leverage?

Answer 48

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