Chapter 12 - Financial Leverage and Financing Alternatives

Loan Underwriting

1. LTV Ratio 2. DSCR Lenders more secure with lower LTV, higher DSCR

Mezzanine Loan

Additional Loans that reduce required equity. Borrowed using owner's equity in a property.

Financial Leverage

Allows an Investor to use less Equity to acquire an Investment. Investors with limited Equity can borrow at higher LTV --> higher risks

Sale - Leaseback

An alternate means of financing a property where seller retains property for duration of lease term.

Interest-only Loan (bullet loan)

Borrower only pays interest on the loan with no principal amortization. However a Balloon Payment is due at maturity

Participating Loan

Lender receives additional interest called "additional equity" or "participation"

Preferred Equity

Ownership in a property/company (not a mortgage) that takes priority for its returns

Leverage

Positive Leverage: Equity Returns are higher WITH debt (more borrowing) - Higher LTV --> higher leveraged return Negative Leverage: Equity Returns are higher WITHOUT debt (less borrowing) - Higher LTV --> lower leveraged return

Convertible Mortgage

When Lender has option to convert Loan Principal to an Ownership Interest (%) in the Property at a specific time

Negative Amortizing Loan

When Loan Pay Rate < Interest Rate, there will be negative amortization. Principal Loan Balance increases over time (used when interest rates too high)