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)