Real Estate Chapter 16 - Commercial Mortgage Types and Decisions
Assume you want to purchase a 100,000 square feet office property in downtown Baltimore. You are required by your lender to set aside $0.50 per square foot per year (end of each year) for nonrecurring capital expenditures. Suppose the deposit rate is 2% and compounding frequency is annual. How much would you accumulate by the end of year 5?
$260,202.01
Suppose Howard Realty Group prepaid a 10-year, 6% commercial mortgage loan at the end of three years without penalty. The original loan amount was $500,000. The loan was being amortized with monthly payments and a 30 year amortization schedule. The remaining balance at the end of 3 years was _________________.
$480,420
Susan is considering buying a class-A office building in Miami. The acquisition price is $2,500,000. She expects the first-year potential gross income (PGI) to be $300,000. Based on her pro forma analysis, vacancy and collection losses comprise 5% of PGI, and operating expenses and capital expenditures will consume 40% of EGI. The interest rate on her commercial mortgage is 6%, with monthly payments and 25-year amortization schedule. If the lender requires the DCR to be 1.35 or greater, what is the maximum loan amount?
1,638,294.68
Susan is considering to buying a class-A office building in Miami. The acquisition price is $2,500,000. She expects the first-year potential gross income (PGI) to be $300,000. Based on her pro forma analysis, vacancy and collection losses comprise 5% of PGI, and operating expenses and capital expenditures are expected to consume 40% of EGI. The interest rate on her commercial mortgage is 6%, with monthly payments and 25-year amortization schedule. If the lender requires the DYR to be 10% or greater, what is the maximum loan amount?
1,710,000
A multifamily property is acquired at a price of $1,000,000. The loan amount is $750,000. The property's first-year pro forma is as follows: NOI: $75,000, operating expenses: $30,000; capital expenditures: $0, and annual debt service: $60,000. What is the estimated DCR?
1.25
The most common loan term of those listed below on fixed-rate commercial mortgages is ________ years.
10
A multifamily property is acquired at a price of $1,000,000. The loan amount is $750,000. The property's first-year pro forma is as follows: NOI, $75,000, operating expenses, $30,000, capital expenditures, $0. Annual debt service, $60,000. What is the estimated debt yield ratio?
10.0%
All else being equal, which of the following balloon mortgages minimizes the lender's interest rate risk?
3-year loan
Ace Realty Trust LLC is considering a purchase of a shopping mall for $1,200,000. If ACE contributes $300,000 in equity and finances the rest with a commercial mortgage loan, what is the initial LTV?
75%
Which of the following statements about Fannie Mae and Freddie Mac are NOT true? Freddie and Fannie remain in the conservatorship of the federal government Freddie and Fannie are no longer active participants in the multifamily mortgage market. A pan to take Freddie and Fannie private has been approved by the U.S. Congress
A pan to take Freddie and Fannie private has been approved by the U.S. Congress
When a lender forecloses on a mortgage loan, the ____ lien holder is entitled to the foreclosure sales proceeds before the ____ mortgage holder receives any of the proceeds from sale.
Blank 1: first Blank 2: second
Which of the following statements about the debt yield ratio (DYR) are correct?
DYR is not affected by the interest rate or the amortization period of a loan. DYR indicates the lender's cash-on-cash return on its invested capital if it took over ownership of the property
Which of the following statements about defeasance clauses are correct? Defeasance clauses eliminate the borrower's interest savings associated with mortgage prepayment. With defeasance clauses, a borrower who prepays must purchase a set of municipal bonds for the lender. Defeasance clauses prohibit borrowers from prepaying. A defeasance clause is typically less costly to borrowers than a yield-maintenance agreement.
Defeasance clauses eliminate the borrower's interest savings associated with mortgage prepayment.
HUD actively participates in the mortgage market by issuing loan guarantees for multifamily mortgages through (enter the acronym).
FHA
True or false: Commercial mortgage borrowers typically default when their equity in the property is negative.
False
True or false: The borrower may be required to deposit a specific amount for legal fees and required third-party reports. These deposits are refundable if the lender decides not to fund the loan.
False
Which of the following statements about HUD are correct? -HUD provides guarantees to lenders for loans used by borrowers to purchase qualified low-income properties. -HUD provides guarantees to lenders for loans used by borrowers to refinance qualified low-income properties. -HUD prohibits local housing authorities from subsidizing the rent payments of low-income households. -HUD initiatives include programs that finance rental housing for the elderly.
HUD provides guarantees to lenders for loans used by borrowers to purchase qualified low-income properties. HUD provides guarantees to lenders for loans used by borrowers to refinance qualified low-income properties. HUD initiatives include programs that finance rental housing for the elderly.
Of the following, which is the primary risk that a lender reduces their exposure to through the use of a balloon mortgage instead of a fully amortizing mortgage?
Interest rate risk
Which of the following is a characteristic of a mezzanine loan? -Failure to make payments on the mezzanine loan can lead to foreclosure on the borrower's property. -It is secured by the borrower's equity interest in the ownership entity. -It is secured by the borrower's pledge of the property as a collateral.
It is secured by the borrower's equity interest in the ownership entity.
Which of the following features describe the promissory note used in commercial mortgage financing?
It is used to create a legal debt. It is usually quite lengthy.
Which of the following type of loan is used to finance improvements to the land, such as sewers, streets, and utilities?
Land development loan
Which of the following are characteristics of a participation loan? The interest rate is generally lower than alternative commercial mortgages. Lender receives a specified portion of a property's cash flows. Lender usually provides a larger loan amount, which is often attractive to borrowers. Lender usually provides a smaller loan amount.
Lender receives a specified portion of a property's cash flows. Lender usually provides a larger loan amount, which is often attractive to borrowers.
Which of the following statements about lockout provisions are correct? Most fixed-rate commercial mortgages allow borrowers to freely prepay at par. Lockout provisions reduce borrowers' reinvestment risk. Lockout provisions reduce lenders' interest rate risk. Lockout provisions reduce lenders' reinvestment risk.
Lockout provisions reduce lenders' reinvestment risk.
Which of the following descriptions of a correspondent relationship is correct?
Mortgage brokers help to mitigate the information asymmetry between borrowers and lenders. Commercial mortgage brokers charge a fee for their service.
A property investment is said to be "cash flowing" when:
NOI exceeds required mortgage payments
The debt yield ratio is defined as
NOI in the next year divided by the loan amount
Which of the following options are the main repayment mechanisms used in long-term commercial mortgages?
Partially amortizing loans Interest-only loans Fully amortizing loans
Which of the following are usually contained in a commercial mortgage loan submission package?
Size of property pledged as collateral Requested loan amount
True or false: An advantage to the borrower of using a mortgage broker is that the broker will generally obtain quotes from multiple lenders.
True
True or false: When a property is sold before the loan term ends, commercial mortgages do not allow transfer of the mortgage liability from the original borrower to the buyer of the property without the approval of the lender.
True
When is a borrower likely to purchase a rate lock agreement on the loan before its closing?
When interest rates are likely to increase after the loan commitment is made but before closing
Financial leverage is frequently used in commercial real estate investments. Which of the following statements about financial leverage are correct?
With respect to the IRR, positive financial leverage occurs when the cost of borrowing is less than the unlevered IRR. Financial leverage is used by some investors because of limited financial resources (savings).
Which of the following clauses or provisions provide commercial mortgage borrowers the ability to prepay the loan, but at a cost to the borrower? Yield-maintenance agreements Prepayment penalties Escrow clauses Lockout provisions
Yield-maintenance agreements Prepayment penalties
In recent years, lenders have been unwilling to relieve borrowers from personal liability in the event of fraud, environmental problems, or unpaid property tax obligations. A clause that holds the actual borrower liable in such instances is commonly referred to as:
a bad boy clause
Prepayment penalties are typically expressed as
a percentage of the remaining mortgage balance
Potential outcomes of the lender's discovery of inconsistencies or errors in the loan submission package include:
a reduction in the loan amount a refusal to fund the loan an alteration of the loan terms
The due diligence process normally occurs
after the signing of the loan application
Land acquisition, development, and construction loans:
are usually prepayable at anytime without penalty usually have floating interest rates
Which of the following lenders is more likely to require some from of credit enhancement on a commercial real estate loan?
commercial banks
All else being equal, floating-rate mortgages ______ the lender's interest rate risk.
decrease
All else equal, when the DCR ratio increases, the likelihood of default by the borrower ______.
decreases
As the use of financial leverage increases, the probability that the property will be "cash flowing" ___________
decreases
Borrowers with negative equity often continue to make mortgage payments because:
default is very costly
The yields on commercial mortgages have been approximately 2 percentage points higher, on average, than the yields on comparable maturity Treasury securities over the past 20-plus years. This lending spread primarily represents compensation to the lender for expected:
default risk
With a participation mortgage, the lender participates in cash flows that are generally received only by the:
equity investor
Assume the "capital stack" of an investment includes the sponsor's equity, "preferred" equity, a first mortgage, and a second mortgage. In the event of default and foreclosure, in what "pecking order" will any cash flow available from the foreclosure sale of the property be distributed?
first lender, second lender, preferred equity, sponsor equity
Mortgage brokers -are allowed to a have a correspondent relationship with only one lender -are not allowed to help borrowers assemble their loan submission package -actually provide the capital to fund the loan -get paid a fee for helping borrowers and lenders find each other.
get paid a fee for helping borrowers and lenders find each other.
In recent years, spreads on bridge loans, relative to Treasury securities,
have been declining
Payments on commercial mortgage loans are expected to come primarily from:
income generated by the property pledged as collateral
A traditional second mortgage, which is subordinate to the secured first mortgage in the event of default and foreclosure, usually ________ the expected return on equity, but also ________ the risk of default.
increases, increases
Typically, financial leverage alters the risk-return relationship of real estate investments by:
increasing the expected IRR on equity. increasing default risk.
No principal reduction occurs from one month to the next with
interest-only mortgages
Due-on-sale clauses primarily protect the ______.
lender
On a partially amortizing loan, monthly payments are based on an amortization term that is ______ the actual term of the mortgage loan.
longer than
The ___ the LTV, the lower is the likelihood of default, all else equal.
lower
The use of financial leverage amplifies the expected IRR on investors' equity. This ___ of equity returns is known as financial leverage.
magnification
A rate lock agreement:
may result in a lower contract interest rate than if the rate is not locked is purchased by the borrower for the benefit of the borrower
Development and construction loans are typically ________ for the lender than permanent mortgages.
more risky
Relative to conventional mortgages, bridge loans are __________ from the lender's perspective and therefore carry ________ contract interest rates.
more risky, higher
The majority of bridge loan financing is provided by
non-traditional lenders
Lockout provisions/clauses in commercial mortgage ___________ the lenders' ______________.
reduce, reinvestment risk
Reducing the term of a fixed rate mortgage from 30 years to 10 years but keeping a 30-year amortization schedule:
reduces the lender's interest rate risk
Lockout provisions, defeasance clauses, prepayment penalties, and yield-maintenance agreement are employed to restrict borrower's prepayment when mortgage rates are declining. They all reduce the lender's _________.
reinvestment risk
The contract interest rate on floating rate commercial real estate loans is typically tied to movements in
short-term interest rates
Larger loans typically have contract interest rates that are ___________ the rates on smaller loans.
slightly lower than
When the contract interest rate is not locked via a rate lock agreement
the borrower and lender will usually agree to a fixed spread over the benchmark interest rate (such as the yield on 10-year Treasury securities)
In commercial mortgage financing, a note contains the terms of the loan and provisions agreed to by the borrower and lender. Typically, the provisions of the promissory note cover matters such as
the penalties for late payments the amounts and timing of periodic payments the borrower's responsibility for maintenance of the property what happens if the borrower defaults
Relative to home loan underwriting, the underwriting of commercial real estate loans is more focused on:
the property pledged as collateral for the loan
Financial risk is the risk that NOI will be insufficient to cover the mortgage payment obligation. Therefore, financial risk is most closely linked to:
the risk of default
In order to have positive financial leverage when a second mortgage or mezzanine loan is used, the ________ property return (cap rate) must be greater than the ________.
unlevered, weighted average cost of debt
Land acquisition, development, and construction loans:
usually have floating interest rates are usually prepayable at anytime without penalty