REE Chp. 16

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; NOI 75,000/DS 60,000

The most common loan term of those listed below on fixed-rate commercial mortgages is ________ years.

10

All else being equal, which of the following balloon mortgages minimizes the lender's interest rate risk? Multiple choice question. 7-year loan 3-year loan 10-year loan 5-year loan

3-year loan

A shopping mall is acquired at a price of $20,000,000 and financed with a blend of equity and debt financing. Specifically, 60% of the acquisition price is finance by an interest-only first mortgage with an interest rate of 3%. The remaining 40% is financed by the equity investor. The property is expected to generate an annual NOI of $1,500,000. Assume the investor has the option to obtain a mezzanine loan with an interest rate of 10% and a loan amount that is equal to 25% of the acquisition price. The remaining 15% of the acquisition price is financed with equity. What is the increase in the investor's expected return on equity in the first year?

7.08%

Which of the following statements about the debt yield ratio (DYR) are correct?

DYR indicates the lender's cash-on-cash return on its invested capital if it took over ownership of the property DYR is not affected by the interest rate or the amortization period of a loan.

Which of the following statements about defeasance clauses are correct?

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

FHA

Which of the following options are the main repayment mechanisms used in long-term commercial mortgages? Multiple select question. Fully amortizing loans Early payment mortgages Interest-only loans Partially amortizing loans

Fully amortizing loans Interest-only loans Partially amortizing loans

Which of the following statements about HUD are correct?

HUD initiatives include programs that finance rental housing for the elderly. HUD provides guarantees to lenders for loans used by borrowers to refinance qualified low-income properties. HUD provides guarantees to lenders for loans used by borrowers to purchase qualified low-income properties.

Which of the following features describe the promissory note used in commercial mortgage financing? Multiple select question. It is used to create a legal debt. It is usually quite lengthy. It makes the loan recourse. It presents in detail the lender's obligations.

It is used to create a legal debt. It is usually quite lengthy.

Which of the following features describe the promissory note used in commercial mortgage financing?

It is usually quite lengthy. It is used to create a legal debt.

Which of the following are characteristics of a participation loan?

Lender usually provides a larger loan amount, which is often attractive to borrowers. Lender receives a specified portion of a property's cash flows.

Which of the following statements about lockout provisions are correct?

Lockout provisions reduce lenders' reinvestment risk.

Interest rates on floating-rate mortgages have typically been tied to the London Interbank Offer Rate (LIBOR). All else being equal, compared to fixed-payment mortgages and from the perspective of the lender, floating-rate mortgages typically have:

Lower interest rate risk but higher default risk

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 are usually contained in a commercial mortgage loan submission package?

Size of property pledged as collateral Requested loan amount

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).

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

The due diligence process normally occurs

after the signing of the loan application

A borrower can increase his or her financial leverage by applying for a second mortgage, which is secured by the borrower's pledge of the property as _______ for the loan

collateral

Which of the following lenders is more likely to require some from of credit enhancement on a commercial real estate loan? Multiple choice question. life insurance companies commercial banks Fannie Mae pension funds

commercial banks

With a yield-maintenance agreement, if the borrower prepays she will have to pay a penalty that is tied to the extent to which mortgage interest rates have ________ since origination.

declined

All else equal, when the DCR ratio increases, the likelihood of default by the borrower _____

decreases

All else equal, when the DCR ratio increases, the likelihood of default by the borrower ______.

decreases

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

True or false: "Good faith" deposits are always nonrefundable.

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

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

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.

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

No principal reduction occurs from one month to the next with

interest-only mortgages

Due-on-sale clauses primarily protect the ______.

lender

Recently, loans on retail properties have been associated with higher delinquency rates. Assuming this trend is going to continue in the near future, lenders will likely to require ________ LTVs on such loans.

low

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

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

Typically, a lockout provision is adopted to ________ prepayment of the remaining mortgage balance for a certain period of time.

prohibit

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

Bridge loans typically have loan terms that are ____________ conventional loans.

shorter than

Larger loans typically have contract interest rates that are ___________ the rates on smaller loans.

slightly lower than

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: Multiple choice question. interest rate risk the risk of default reinvestment risk the risk of prepayment

the risk of default

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

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 Multiple select question. what happens if the borrower defaults the property pledged as collateral for the loan the borrower's responsibility for maintenance of the property the amounts and timing of periodic payments the penalties for late payments

what happens if the borrower defaults the borrower's responsibility for maintenance of the property the amounts and timing of periodic payments the penalties for late payments