Week 7 CRE

What does CML stand for in real estate finance?

Commercial mortgage loan

What is the commercial mortgage loan (CML) origination process?

The process lenders use to evaluate and structure a commercial real estate loan

What are the four main steps of the CML origination process?

Pricing, sizing, structuring, and enhancing

What does “pricing” refer to in a commercial mortgage loan?

The interest rate or effective cost of borrowing

What does “sizing” refer to in a commercial mortgage loan?

The loan proceeds or initial loan amount

What does “structuring” refer to in a commercial mortgage loan?

The loan term and amortization schedule

What does “enhancing” refer to in a commercial mortgage loan?

Additional security required by the lender

What FinCalc input represents pricing?

i

What FinCalc input represents sizing?

PV

What FinCalc input represents structuring?

N

What determines the debt service payment (PMT)?

Pricing, sizing, and structuring

What does pricing reflect in lending decisions?

The lender’s required return for risk

What two components make up a commercial mortgage loan coupon rate?

Risk-free index and spread

What is the formula for the coupon rate?

Risk-free index + spread

Why do lenders add a spread to the risk-free rate?

To compensate for credit and market risk

What is risk in finance?

Uncertainty about future outcomes

What relationship exists between risk and return?

Higher perceived risk requires higher expected return

What is the most critical risk in commercial mortgage lending?

Default

What does default mean in lending?

Failure of the borrower to meet loan obligations

What are common risks in commercial mortgage lending?

Interest rate risk, prepayment risk, liquidity risk, and default risk

What is interest rate risk?

The risk that changes in interest rates affect loan value or profitability

What is prepayment risk?

The risk that a borrower repays the loan early

What is liquidity risk?

The risk that an asset cannot be quickly converted to cash

What is default risk?

The risk that a borrower fails to repay the loan

What is a basis point (bp)?

One hundredth of one percent

How many basis points equal 1 percent?

100 basis points

If a rate falls from 6.55% to 6.50%, how many basis points did it change?

5 basis points

What determines loan pricing besides risk?

Conditions in the broader investment market

What investment alternatives influence mortgage pricing?

Bonds, stocks, and other investment opportunities

What credit metrics do lenders use to evaluate commercial mortgage loans?

LTV, DSCR, and Debt Yield

What does LTV stand for?

Loan-to-Value ratio

How is LTV calculated?

Loan amount / property value

What does DSCR stand for?

Debt Service Coverage Ratio

How is DSCR calculated?

NOI / annual debt service

What does debt yield measure?

Property income relative to loan size

How is debt yield calculated?

NOI / loan amount

What does GIDY stand for?

Going-in debt yield

What does EDY stand for?

Exit debt yield

What does a higher DSCR indicate?

Greater ability to cover debt payments

What does a higher debt yield indicate?

Lower lender risk

What does a lower LTV indicate?

Lower credit risk

What is a lender’s “strike zone”?

The acceptable range of credit metrics for making a loan

What determines whether a loan fits within a lender’s strike zone?

DSCR, LTV, and debt yield

What does sizing determine in a loan?

The initial mortgage loan amount

What metric is most directly associated with loan sizing?

LTV

What does structuring determine in a loan?

The repayment timeline and amortization schedule

What type of loan structure includes a balloon payment?

A partially amortizing loan

What is a balloon payment?

A large remaining loan balance due at maturity

How does a longer amortization period affect debt service payments?

It lowers the periodic payment

Why does a loan that does not fully amortize have lower payments?

Because part of the principal remains unpaid until maturity

What is enhancing in loan structuring?

Adding protections that reduce lender risk

What are examples of loan enhancements?

Recourse guarantees, reserve funds, and lockboxes

What is recourse in lending?

A borrower guarantee that allows the lender to pursue personal assets

What is a reserve fund in commercial lending?

Cash set aside for future expenses like leasing costs

What is a lockbox in commercial real estate lending?

A system where property income is controlled by the lender

What is a hard lockbox?

A lender-controlled account that collects property income directly

What is effective borrowing cost in loan pricing?

The true monthly yield on the loan

What variable represents the true monthly interest rate in loan calculations?

i

What does the term “coupon rate” mean in lending?

The nominal annual interest rate on the loan

What does the term “effective cost of capital” mean for borrowers?

The true cost of borrowing funds

What are sports analogies used for in commercial lending discussions?

Describing deal positioning and evaluation

What does “in the ballpark” mean in deal analysis?

The deal is within acceptable lending parameters

What does “chasing a deal” mean in lending?

Trying to win a deal by adjusting loan terms

What does “position relative to the pack” mean?

Comparing loan terms with competing lenders

What does “fishing for information” mean in deal discussions?

Attempting to gather more deal details

What does “the deep dive” mean in underwriting?

Conducting detailed analysis of a deal

What does “pitching a deal” mean?

Presenting a loan opportunity to decision-makers

What are day-count conventions?

Methods used to calculate interest accrual on loans

Why do day-count conventions matter in mortgage pricing?

They affect how much interest accrues

What does the 30/360 convention assume?

30 days per month and 360 days per year

What is the 30/360 convention commonly called?

The banker’s year

What does the 30/365 convention assume?

30 days per month and 365 days per year

What does Actual/360 mean?

Interest calculated using actual days divided by 360

What does Actual/365 mean?

Interest calculated using actual days divided by 365

What does Actual/Actual mean?

Interest calculated using the exact number of days in the period and year

Why do lenders use different day-count conventions?

To standardize interest calculations across loans

What must be calculated first when determining daily interest?

The daily interest rate

What happens after daily interest is calculated?

It is multiplied by the number of days in the period

What information is typically included when pitching a commercial mortgage loan?

Proceeds, liability structure, amortization, loan term, and borrowing cost

What does proceeds refer to in a loan pitch?

The amount of money provided by the lender

What does liability refer to in a loan pitch?

Whether the loan is recourse or non-recourse

What does amortization describe in a loan pitch?

The schedule of principal repayment

What does term describe in a loan pitch?

The length of the loan agreement