Week 8 CRE

What does CML stand for in real estate finance?

Commercial mortgage loan

What is the purpose of a commercial mortgage loan?

To finance commercial real estate investments

In what situation is a commercial mortgage loan used to facilitate property acquisition?

When an investor purchases a commercial property

In what situation is a commercial mortgage loan used for construction?

When financing the development of a new commercial property

In what situation is a commercial mortgage loan used to refinance?

When replacing an existing mortgage loan with a new one

What does refinancing mean in commercial real estate?

Replacing an existing loan with a new loan

In what situation is a commercial mortgage loan used to recapitalize a property investment?

When restructuring the ownership or capital structure of the property

What does recapitalization mean in real estate finance?

Changing the mix of debt and equity in a property investment

Commercial mortgage loans are typically originated for what purposes?

Property acquisition, construction financing, refinancing, or recapitalization

What does “origination” mean in lending?

The creation or issuance of a new loan

What is exit risk in commercial mortgage lending?

The risk that the borrower cannot refinance the loan at maturity

Why do lenders analyze exit risk?

To determine whether the borrower will likely qualify for refinancing later

What is another name for exit risk analysis?

Refinance risk analysis

What does refinance risk measure?

The borrower’s ability to replace the loan at maturity

What key credit metrics are used in exit risk analysis?

DSCR, LTV, and Debt Yield

What does debt yield measure in commercial real estate lending?

Net operating income relative to the loan amount

How is debt yield calculated?

NOI / loan amount

What does GIDY stand for?

Going-in Debt Yield

What does GIDY measure?

Debt yield at the time the loan is originated

How is Going-in Debt Yield calculated?

Initial NOI / the initial loan amount

What does EDY stand for?

Exit Debt Yield

What does EDY measure?

Debt yield at loan maturity based on the remaining loan balance

How is Exit Debt Yield calculated?

NOI / the expected loan balance at maturity

Why is Debt Yield an important credit metric?

It measures lender risk without relying on interest rates or property values

Why do lenders value Debt Yield as a credit metric?

Because it focuses on property income relative to loan size

What does a higher Debt Yield indicate?

Lower lender risk

What does a lower Debt Yield indicate?

Higher lender risk

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 DSCR measure?

The borrower’s ability to cover loan payments

What does a DSCR greater than 1 mean?

The property generates enough income to cover debt payments

What does a DSCR of 1.58 mean?

The property generates 1.58 times the income needed to cover debt service

What is underwriting in commercial real estate lending?

The process of evaluating a loan’s risk and financial feasibility

What is underwritten NOI?

The lender’s estimate of the property’s net operating income

What does NOI stand for?

Net operating income

How is NOI calculated?

Property income - operating expenses

What property characteristic describes the amount of rentable space?

Net rentable area

What does NRA stand for?

Net rentable area

What does occupancy rate measure?

The percentage of rentable space currently leased

Why is occupancy important for lenders?

It affects the property’s income stability

What does property valuation represent?

The estimated market value of the property

What does price per square foot measure?

Property value / total square footage

What does loan sizing determine?

The initial loan amount

What does loan structuring determine?

The loan term and amortization schedule

What does loan pricing determine?

The interest rate charged on the loan

What is the coupon rate?

The nominal interest rate on the loan

What is the purpose of a day-count convention in lending?

To determine how interest accrues over time

What day-count convention assumes 30 days per month and 360 days per year?

30/360

What is the typical purpose of credit enhancements in commercial lending?

To reduce lender risk

What does it mean if a loan has no credit enhancements?

The loan relies solely on property income and collateral

What does amortization describe in a loan?

The schedule of principal repayment over time

What does loan term refer to?

The length of time before the loan matures

What happens at loan maturity if the loan is not fully amortized?

The remaining balance must be repaid or refinanced

What is the remaining loan balance at maturity called?

The balloon balance

Why is balloon risk important in commercial lending?

The borrower must refinance or repay the remaining balance

What is the goal of exit (refi) risk analysis?

To determine whether refinancing will be possible at maturity

What factors influence exit refinance risk?

Property income, loan balance, and credit metrics

Why is analyzing EDY important for refinance risk?

It estimates whether the property income can support future financing

What does a strong Exit Debt Yield suggest?

Lower refinance risk

What does a weak Exit Debt Yield suggest?

Higher refinance risk

What information is included in a real deal loan pitch?

Property characteristics, loan structure, credit metrics, and pricing

What does the lender evaluate when reviewing a loan pitch?

Risk, return, and refinance feasibility

What is the lender’s ultimate decision based on?

Whether the loan fits the lender’s underwriting guidelines