Deck 16: Commercial Mortgage Types and Decisions

Question 1

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.

Answer 1

C

Question 2

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

Answer 2

A

Question 3

Significant tax benefits can be gained by using an alternative financing arrangement for commercial property transactions.When the seller allows the buyer to pay the purchase price over a number of years,recognition of the taxable gain can be spread over several years,thereby reducing the present value of the tax payments.This type of financing arrangement is commonly referred to as a(n):

A)installment sale
B)joint venture
C)land sale-leaseback
D)complete sale-leaseback

Answer 3

A

Question 4

With respect to bearing the risk of future property price fluctuations,which of the following lending relationships is viewed as the most risky from the borrower's perspective?

A)Straight debt
B)Joint venture
C)Land sale-leaseback
D)Complete sale-leaseback

Question 5

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 6

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 7

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 8

Of the following lending relationships,which gives the borrower the most senior claim to the cash flows associated with a property?

A)Straight debt
B)Joint venture
C)Land sale-leaseback
D)Complete sale-leaseback

Question 9

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.The relatively short loan term on a balloon mortgage reduces the lender's exposure to which of the following risks?

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

Question 10

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

Question 11

Commercial real estate loan application packages typically contain cash flow estimates that look at the expected cash flow from rental operations for the subject property.Specifically,lenders provide the borrower with a discounted cash flow analysis commonly referred to as a(n):

A)appraisal report
B)pro forma
C)loan commitment
D)rate lock agreement

Question 12

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 13

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 14

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 15

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 16

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 17

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):

A)installment sale
B)joint venture
C)land sale-leaseback
D)complete sale-leaseback

Question 18

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 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?

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

Question 20

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

Question 21

Given the following information,calculate the break-even ratio on the following commercial property.Operating expenses: $650,000,Capital expenditures: $105,000,Potential gross income: $2,500,000,Debt service in the first year: $960,000,Loan amount: $20,000,000,Purchase price: $27,300,000

A)43.7 %
B)55.8 %
C)68.6 %
D)75.2 %

Question 22

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 23

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