Deck 16: Commercial Mortgage Types and Decisions

Question 1

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?

A) Land acquisition loans
B) Land development loans
C) Construction loans
D) Bridge loans

Answer 1

B

Question 2

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

A) Mini-perm loan
B) Mezzanine loan
C) Land acquisition loan
D) Bullet loan

Answer 2

D

Question 3

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?

A) Loan application
B) Loan commitment
C) Loan underwriting
D) Loan document

Answer 3

B

Question 4

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:

A) habendum clause
B) lockout provision
C) defeasance
D) "bad boy carve-out" clause

Question 5

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
B) Loan submission
C) Loan development
D) Defeasance

Question 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?

A) Lockout provisions
B) Yield-maintenance agreements
C) Defeasance
D) Curtailment

Question 7

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
B) Interest rate risk
C) Liquidity risk
D) Pipeline risk

Question 8

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?

A) Default risk
B) Interest rate risk
C) Liquidity risk
D) Financial risk

Question 9

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:

A) debt coverage ratio (DCR)
B) loan-to-value ratio (LTV)
C) break-even ratio (BER)
D) price-earnings ratio (PE)

Question 10

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
B) Floating-rate mortgage loans
C) Mezzanine loans
D) Construction loans

Question 11

Land acquisition, development, and construction loans used by developers differ significantly from the "permanent" mortgages that traditionally are used to finance the purchase of commercial properties. All of the statements listed below are true regarding land acquisition, development, and construction loans EXCEPT:

A) Developers can never be held personally liable for such loans
B) These loans have floating interest rates tied to short-term interest rate indices
C) These loans are interest-only loans.
D) These loans can be prepaid at any time without penalty.

Question 12

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?

A) Second mortgage loan
B) Mezzanine loan
C) Mini-perm loan
D) Construction loan

Question 13

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
B) Property externality
C) Joint venture
D) Mezzanine loan

Question 14

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
B) mini-perm loan
C) partially amortizing loan
D) interest-only loan

Question 15

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
B) Interest rate risk
C) Pipeline risk
D) Fallout risk

Question 16

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?

A) The yield on a constant maturity Treasury security of the same term
B) The cost of funds index (COFI)
C) The London Interbank Offer Rate (LIBOR)
D) The interest rate on a comparable maturity level-payment mortgage

Question 17

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:

A) The use of financial leverage by real estate investors mitigates the impact that limited financial resources would otherwise have on their pursuit of investment opportunities.
B) The use of financial leverage by real estate investors will increase the internal rate of return (IRR) on equity as long as the cost of borrowing is less than the unlevered IRR.
C) The use of financial leverage reduces the real estate investor's exposure to default risk.
D) The use of financial leverage by real estate investors makes the realized return on equity more sensitive to changes in rental rates and resale values.

Question 18

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?

A) Individual borrower's credit quality
B) Income producing potential of the collateral property
C) Individual borrower's wages
D) Individual borrower's personal assets

Question 19

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):

A) installment sale
B) joint venture
C) correspondent relationship
D) sale-leaseback

Question 20

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:

A) Lockout
B) Yield-maintenance
C) Defeasance
D) Curtailment

Question 21

When a lender receives a specified portion of a property's net operating income and/or net sale proceeds as part of the loan agreement, this loan type is more commonly referred to as a:

A) Mini-perm loan
B) Mezzanine loan
C) Participation loan
D) Bullet loan

Question 22

The flexibility to prepay the principal on a mortgage loan differs significantly between commercial and residential mortgages. Which of the following clauses prohibits prepayment of the mortgage loan for a specified period of time after its origination?

A) Lockout provisions
B) Yield maintenance agreements
C) Defeasance
D) Curtailment

Question 23

Construction loans are used to finance the costs associated with erecting the building or buildings on a site. All of the following would be typical of a construction loan EXCEPT:

A) LTV ratios above 90 percent
B) Preleases with anchor tenants
C) Relatively short maturity length of one to three years that may also allow for time to construct and lease up the project
D) Personal liability

Question 24

Given the following information, calculate the loan-to-value ratio of this commercial loan. Estimated net operating income in the first year: $150,000, Debt service in the first year: $100,000, Loan amount: $1,000,000, Purchase price: $1,300,000

A) 0.08
B) 0.77
C) 1.30
D) 1.75

Question 25

Based on your understanding of the concept of a lockout provision, lenders are able to reduce their exposure to which of the following risks through its use?

A) Default risk
B) Reinvestment risk
C) Liquidity risk
D) Interest rate risk

Question 26

A commercial real estate loan may take 90 days from the signing of the purchase and sale contract until loan closing. Therefore, there is the possibility for interest rates to fluctuate during this period. In some cases, the lender may offer the borrower the opportunity to "lock in" the interest rate on the loan. To protect against exposure to rate increases during this period, the borrower is often willing to pay a nonrefundable fee as part of what is more commonly known as a:

A) Lockout provision
B) Rate lock agreement
C) Floating rate agreement
D) Yield maintenance provision

Question 27

Commercial banks most commonly provide floating rate loans. However, borrowers who prefer a fixed rate can obtain an agreement that exchanges floating rate payments for a fixed rate schedule. This type of agreement is more commonly referred to as a(n):

A) Curtailment
B) Defeasance
C) Foreclosure
D) Interest rate swap

Question 28

Suppose you are considering the purchase of an apartment building that has 12 units that can be rented out at $1,050 per month. You have estimated operating expenses and expected vacancy and collection losses for the first year to be $35,700 and $30,240, respectively. You also have estimated that you will be able to generate an additional $3,840 in the first year from garage rentals on the property. If the expected purchase price of the property is $1,100,000 and you are planning on making a 10% down payment, calculate the debt yield ratio.

A) 8.10%
B) 8.61%
C) 9.00%
D) 12.05%

Question 29

Assume you have taken out a balloon mortgage loan for $2,500,000 to finance the purchase of a commercial property. The loan has a term of 5 years, but amortizes over 25 years. Calculate the balloon payment at maturity (Year 5) if the interest rate on this loan is 4.5%.

A) $5,637.99
B) $13, 895.82
C) $2,196,447.59
D) $2,495,479.19

Question 30

Given the following information, calculate the debt yield ratio on the following commercial property. Estimated Net Operating Income in the first year: $2,500,000, Debt service in the first year: $960,000, Loan amount: $20,000,000, Purchase price: $27,300,000

A) 4.8%
B) 12.5%
C) 68.6 %
D) 75.2 %

Question 31

Given the following information, calculate the debt coverage ratio of this commercial loan. Estimated net operating income (NOI) in the first year: $150,000, Debt service in the first year: $100,000, Loan amount: $1,000,000, Purchase price: $1,300,000

A) 0.15
B) 0.67
C) 1.30
D) 1.50

Question 32

The note is the document used to create a legal debt. In most states, the note creates personal liability for residential borrowers. When mortgage lenders have access to other borrower assets in situations where the foreclosure sale price is less than the total amount of the loan outstanding, we commonly refer to this type of loan as a:

A) nonrecourse loan
B) mini-perm loan
C) partially amortizing loan
D) recourse loan

Question 33

Some investors obtain more than one loan when acquiring properties, thereby substituting more debt financing for equity financing. A traditional second mortgage is secured by:

A) an equity interest in their company (e.g., LLC)
B) the borrower's pledge of the property as collateral
C) a set of US Treasury securities whose coupon payments replace the mortgage cash flows
D) a balloon payment made by a government sponsored enterprise

Question 34

If the mortgage loan is going to be packaged with similar loans and then resold to investors as part of a commercial mortgage-backed security, the originating lender may rely more heavily on examining which of the following ratios in order to determine the maximum amount they are willing to lend to the borrower? (Note: This ratio indicates the cash-on-cash return the lender would earn on its invested capital if it had to foreclose on the property immediately after originating the loan)

A) Debt coverage ratio
B) Debt yield ratio
C) Debt service ratio
D) Equity dividend ratio