EOCP16_090109 - CHAPTER 16 Commercial Mortgage Types and...

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CHAPTER 16 Commercial Mortgage Types and Decisions Test Problems 1. Due-on-sales clauses are included in commercial mortgages primarily to protect lenders from: b. Default risk. 2. Consider a 30-year, 7 percent, fixed rate, fully amortizing mortgage with a yield maintenance provision. Relative to this mortgage, a 10-year balloon mortgage with the same interest rate and yield maintenance provisions will primarily reduce the lender’s: a. Interest rate risk. 3. Lockout provisions are primarily intended to reduce the lender’s : c. Reinvestment risk 4. The tax-benefits associated with installment sales are: b. Captured exclusively by the seller. 5. Which of the following statements is most accurate? b. Joint ventures usually decrease the amount of equity capital the developer/borrower must invest in the project. 6. Which of the following financing structures provides for 100 percent financing? d. Complete (land and building) sale-leaseback 7. Using financial leverage on a real estate investment can be for the purpose of all of the following except: d. Reduction of financial risk for the leveraged investment. 8. Which of these ratios is an indicator of the financial risk for an income property? d. Both a and b, but not c 9. If the property’s NOI is expected to be $22,560 operating expenses $12,250, and the debt service $19,987, the debt coverage ratio (DCR) is approximately equal to: b. 1.13. 10. With a mezzanine loan c. the borrower’s promise to pay is secured by the equity interest in the borrower’s limited partnership or limited liability company. 1
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Study Questions 1. Discuss several differences between long-term commercial mortgages and their residential counterparts. Solution : Commercial mortgages have shorter terms than residential mortgages; five to ten- year terms are common for commercial mortgages and residential mortgages can be payable for up to 30 years. Commercial loans are typically nonrecourse, while residential borrowers are personally responsible for the amount borrowed. Restrictions on prepayment are commonly included with commercial mortgages but not residential mortgages. Residential mortgages are typically standardized; in contrast, most commercial mortgages do not conform to any specific standards or regulations, although this is changing rapidly as an increasing number of commercial real estate loans are being securitized. 2. Answer the following questions on financial leverage, value, and return: a. Define financial risk b. Should the investor select the origination LTV that maximizes the IRR on equity? Explain why or why not. Solution : a. Financial risk refers to the risk that NOI will be less than debt service. A positive correlation exists between the amount of debt service and financial risk. b.
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This note was uploaded on 02/19/2012 for the course RE 358 taught by Professor Cahoon during the Spring '12 term at University of Texas at Dallas, Richardson.

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EOCP16_090109 - CHAPTER 16 Commercial Mortgage Types and...

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