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COMMERCIAL PROPERTY FINANCING

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.

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COMMERCIAL PROPERTY FINANCING

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  1. 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.

  2. 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.

  3. 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 10- years, and often include a ballon payment. • Commercial mortgages are often nonrecourse loans.

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

  5. Example Commercial Mortgage Loan Terms

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

  7. OTHER EQUITY PARTICIPATION ARRANGEMENTS • Joint Ventures • Sale-Leasebacks

  8. 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

  9. 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.

  10. The Effect of Leverage

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

  12. LOAN UNDERWRITING • The Property and Borrower • Property Type, Quality, and Location • Tenant Quality and Lease Terms • Environmental Concerns • Borrower Experience and Resources

  13. 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

  14. 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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