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					COMMERCIAL PROPERTY FINANCING
LEARNING OBJECTIVES
• Discuss the most common types of long-term commercial mortgages and their common provisions. • Discuss financing structures that allow lenders to participate in the property. • Discuss the advantages and disadvantages of financial leverage.

COMMERCIAL PROPERTY FINANCING
LEARNING OBJECTIVES
• Identify and explain the items commonly included in a loan submission package. • Identify the elements of the loan application that lenders focus on in making funding decisions. • Discuss the typical sequence of financing for a new development.

COMMERCIAL MORTGAGE MARKET CHARACTERISTICS
• The primary market is dominated by commercial banks and life insurance companies. • In recent years, the size of the CMBSs market has grown dramatically. • Commercial mortgages are typically 5- to 10years, and often include a ballon payment. • Commercial mortgages are often nonrecourse loans.

COMMON TYPES OF PERMANENT MORTGAGES
• Balloon Mortgages • Common Loan Provisions • lock-out, prepayment, and yield maintenance provisions • Floating Rate Loans • Installment Sale Financing

Example Commercial Mortgage Loan Terms
Rates – Fixed Rates – Floating Spreads over Treasuries on Fixed Rate Loans Spreads over LIBOR on Floating Rate Loans Maximum LTVR Minimum Debt Service Coverage Loan Term 7.25-8.15% 6.60-7.60% 125-176 bp 100-200 bp 75% 1.15-1.20 1-10

PERMANENT MORTGAGES WITH EQUITY PARTICIPATION
• Participation Mortgages
• income kickers • equity kickers • contingent interest

OTHER EQUITY PARTICIPATION ARRANGEMENTS
• Joint Ventures • Sale-Leasebacks

THE BORROWER’S DECISION MAKING PROCESS
• Two basic reasons real estate investors use borrowed funds: • to increase the size of their purchase (affordability), and • to magnify their expected rate of return (leverage). • Positive and Negative Leverage

The Effect of Leverage
• Increased Financial Risk • Increased Variability of Returns. • effect on before- and after-tax cash flows. • effect on before- and after-tax equity reversion.

The Effect of Leverage

=

Initial LTVR NOI in yr. 1 Debt Service BTCF Initial Equity BTCF/Initial Equity Mean IRR

0% 60% 80% $1,272,500 $1,272,500 $1,272,500 ---683,773 857,038 1,272,500 584,727 415,462 13,375,000 5,350,000 3,375,000 9.51% 10.93% 12.31% 10.68% 14.58% 17.84%

THE LOAN SUBMISSION PACKAGE
• Loan Application • Property Description and Legal Aspects • Cash Flow Estimates • Appraisal Report and Feasibility Study

LOAN UNDERWRITING
• The Property and Borrower
• Property Type, Quality, and Location

• Tenant Quality and Lease Terms
• Environmental Concerns

• Borrower Experience and Resources

The Maximum Loan Amount
• The Loan-to-Value Ratio: LTV = Vm / Vo • The Debt Service Coverage Ratio: DCR = NOI / Debt Service • The Break-Even Ratio: BER = (OE + DS) / EGI

ACQUISITION, DEVELOPMENT, & CONSTRUCTION LOANS
• Land Purchase and Development Financing • Construction Financing • take-out commitments • gap loans • open-ended loans • mini-perm. loans


				
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