Real Estate Ch. 16

16. Relative to residential loans, the underwriting process for commercial loans is more complicated. The commercial loan underwriting process focuses first on which of the following?

B. Income producing potential of the collateral property

15. Although nonrecourse loans dominate the commercial mortgage lending practices of pension funds, life insurance companies, and commercial mortgage-backed security (CMBS) originators, banks are likely to require some form of a guarantee by the organizer/sponsor of the investment opportunity to make the lender whole in the event the lender suffers a loss on the loan. This protection to the lender is more commonly referred to as a:

A. Credit enhancement

8. While floating rate mortgage loans may offer lower interest rates to borrowers than comparable fixed-payment mortgages, floating-rate loans may increase a lender's exposure to which of the following risks since borrowers may not be able to continue to service the debt if payments on the loan increase significantly?

A. Default risk

9. The yields on commercial mortgages have been approximately 2 percent higher, on average, than the yields on comparable maturity treasury securities over the past 15 years. Often considered the signature risk of commercial mortgage lending, this spread primarily represents:

A. Default risk

18. Once a loan application is signed, the lender begins a process that typically includes ordering the fee appraisal, the title report, and a number of third party inspection, compliance, and engineering reports in an attempt to make sure the potential borrower did not misrepresent the property in any way in the original loan submission package. This process is more commonly referred to as:

A. Due diligence

3. Which of the following types of loans is the most common instrument used to finance the acquisition of existing commercial property?

A. Fixed-rate balloon mortgage loans

1. One of the main differences between residential mortgage loans and permanent financing of commercial real estate lies in the allocation of liability in the case of default. In commercial real estate, a "bankruptcy remote" special-purpose entity is created that shields the actual borrower from personal liability. When a lender cannot lay claim to the personal assets of the defaulted borrower, this type of loan is commonly referred to as a:

A. nonrecourse loan

5. While balloon mortgage loan payments are typically based on a 30-year amortization schedule, the loan actually matures in either 3, 5, 7, or 10 years. Of the following, which is the primary risk that a lender reduces their exposure to through the relatively short loan term on a balloon mortgage?

B. Interest rate risk

20. Different financing requirements usually are involved in the various phases of a property's life. Which of the following types of loans is used to finance improvements to the land, such as sewers, streets and utilities?

B. Land development loans

19. Which of the following terms refers to a written agreement that binds the lender to make a loan to the borrower provided the borrower satisfies the terms and conditions of the agreement?

B. Loan commitment

11. There are a number of alternatives when it comes to the capital structure for acquisitions of commercial real estate. Through which of the following lending relationships does the lender have the right to foreclose on the equity of the borrower's company in the case of default?

B. Mezzanine loan

6. In contrast to residential mortgage loans, most fixed-rate commercial mortgages do not allow borrowers to freely prepay the principal on their loan. Which of the following prepayment penalties ties the penalty that borrowers pay to how far interest rates have declined since origination?

B. Yield-maintenance agreements

10. An alternative vehicle for financing commercial property involves having the lender acquire an ownership (equity) interest in the property by supplying a portion of the required equity capital in addition to providing the permanent debt financing. This type of financing arrangement is commonly referred to as a(n):

B. joint venture

13. In order to better understand a borrower's probability of default, lenders have a number of tools at their disposal. The ratio that measures the percentage of the price (or value) of a property that is encumbered by the first mortgage is referred to as the:

B. loan-to-value ratio (LTV)

7. If mortgage rates decline significantly, borrowers may decide to prepay the principal on their loan even if they face prepayment penalties. One way that lenders protect themselves from prepayments in such circumstances is by requiring the borrower who prepays to purchase for the lender a set of U.S. Treasury securities whose coupon payments replicate the cash flows the lender will lose as a result of the early retirement of the mortgage. This process is referred to as:

C. Defeasance

4. Some commercial mortgages have adjustable, or floating, interest rates. The index rate to which the contract rate is tied is typically which of the following for commercial mortgages?

C. The London Interbank Offer Rate (LIBOR)

14. The use of financial leverage by real estate investors can be a double-edged sword. All of the following statements regarding the use of financial leverage by real estate investors are true EXCEPT:

C. The use of financial leverage reduces the real estate investor's exposure to default risk.

17. Prospective borrowers often submit loan requests directly to lenders. However, commercial loan requests can also be submitted through another channel in which a permanent lender agrees to purchase loans or consider loan requests from a mortgage banker or broker. This type of business relationship is more commonly referred to as a(n):

C. correspondent relationship

2. 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. Therefore, some lenders include a clause that pierces the single-purpose borrowing entity to hold the actual borrower liable in such instances. This clause is commonly referred to as a:

D. "bad boy carve-out" clause

12. An interest-only balloon mortgage loan is commonly referred to as a(n):

D. Bullet loan