commercial property financing
DESCRIPTION
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. - PowerPoint PPT PresentationTRANSCRIPT
COMMERCIAL PROPERTY FINANCING
LEARNING OBJECTIVESDiscuss 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 OBJECTIVESIdentify 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 10- years, and often include a ballon payment.
Commercial mortgages are often nonrecourse loans.
COMMON TYPES OF PERMANENT MORTGAGES
Balloon MortgagesCommon Loan Provisions
lock-out, prepayment, and yield maintenance provisions
Floating Rate LoansInstallment Sale Financing
Example Commercial Mortgage Loan Terms
Rates – Fixed 7.25-8.15% Rates – Floating 6.60-7.60% Spreads over Treasuries on
Fixed Rate Loans
125-176 bp Spreads over LIBOR on
Floating Rate Loans
100-200 bp Maximum LTVR 75% Minimum Debt Service
Coverage
1.15-1.20 Loan Term 1-10
PERMANENT MORTGAGES WITH EQUITY PARTICIPATION
Participation Mortgagesincome kickersequity kickerscontingent interest
OTHER EQUITY PARTICIPATION ARRANGEMENTS
Joint VenturesSale-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 0% 60% 80% NOI in yr. 1 $1,272,500 $1,272,500 $1,272,500
- Debt Service ---- 683,773 857,038 = BTCF 1,272,500 584,727 415,462 Initial Equity 13,375,000 5,350,000 3,375,000 BTCF/Initial Equity 9.51% 10.93% 12.31% Mean IRR 10.68% 14.58% 17.84%
THE LOAN SUBMISSION PACKAGE
Loan ApplicationProperty Description and Legal AspectsCash Flow EstimatesAppraisal Report and Feasibility Study
LOAN UNDERWRITING
The Property and BorrowerProperty Type, Quality, and LocationTenant Quality and Lease TermsEnvironmental ConcernsBorrower 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 FinancingConstruction Financing
take-out commitmentsgap loansopen-ended loansmini-perm. loans