Chapter 12 - Financial Leverage and Financing Alternatives

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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)


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