REE4303 Exam
Future Value (FV) - ANSvalue of money in some period beyond time zero.
FV=PV(1+r)^n
Non-Recourse - ANSyou can walk away from the property if something
goes wrong, no personal liability
Lump sum payment - ANSPayout, "balloon" payment, paying off the
balance of the loan at maturity
Partially amortizing loans - ANSriskier for the lender, if they have a large
amount leftover they can likely default on their loan
Lock Out - ANSprohibition against pre-payment of loan up to a certain
amount of time, prepayment of loans are risky/bad for lender
Yield Maintenance Penalty - ANSborrower must pay lender PV of losses due
to prepayment, used by life insurance companies
Prepayment Risk - ANSmarket interest rate declines, the borrower will want
to repay their mortgage, hurts the lender because they will receive a smaller
amount
Defeasance Penalty - ANSborrower must replace mortgage loan with a set of
US Treasury securities that produce CFs equivalent to those on paid-off mortgage
(prepayment penalty)
Mezzanine Mortgage - ANSequity interest of the 2nd borrower is pledged,
commonly used in addition to the first mortgage to offer more debt financing
options
Financial Risk - ANSprobability that the NOI is not enough to cover the debt
service
Debt service - ANSthe timely payment on the principal and interest of your
mortgage, monthly payments
Default risk - ANSrisk of default, financial risk doesn't necessarily have to
mean default risk
Debt Coverage Ratio - ANS"cash flow cushion"
, DCR = NOI/ DS (debt service)
Loan to Value Ratio - ANSLTV = Loan Amount/ Acquisition Price
Debt Yield Ratio - ANSindicator of lender's mortgage "return"
DYR = NOI / Loan Amount
Sale-leaseback - ANSowner-user (bank, restaurant, drug store, etc.) sells
property to long term real estate investor, then leases the property back from the
investor and occupies it under long term net lease
Letter of Intent (LOI) - ANSloan application quote, includes loan amount
and what interest rate they will be using
Land Acquisition Loan - ANSfinance purchase of raw land, speculative
development, RISKY
Land Development loan - ANSready for development, less riskier than
acquisition, what they are going to build can be pledged as collateral
construction loan - ANSless riskier, finance vertical construction
Public Equity - ANSalmost all of public equity is from real estate investment
trusts (REITS)
Private Equity - ANSpension funds, life insurance, foreign investors, hedge
and mutual funds
Public Debt - ANScommercial mortgage backed securities
Special Allocations - ANSmanagement team get a larger proportion of the
profit relative to their initial investment because they are basically doing all of the
work, works out incentives of shareholders who don't do much work compared
with management
General Partnership - ANSnot commonly used in CRE, liable for all debts
(personally)
Limited Partnerships - ANSone or 2 general partners, then multiple limited
partners. GP = developer or operator partners, LP= limited liabilities, will not
participate in the business operations.
Flow through tax treatment (no corporate level taxation or double taxation)
Future Value (FV) - ANSvalue of money in some period beyond time zero.
FV=PV(1+r)^n
Non-Recourse - ANSyou can walk away from the property if something
goes wrong, no personal liability
Lump sum payment - ANSPayout, "balloon" payment, paying off the
balance of the loan at maturity
Partially amortizing loans - ANSriskier for the lender, if they have a large
amount leftover they can likely default on their loan
Lock Out - ANSprohibition against pre-payment of loan up to a certain
amount of time, prepayment of loans are risky/bad for lender
Yield Maintenance Penalty - ANSborrower must pay lender PV of losses due
to prepayment, used by life insurance companies
Prepayment Risk - ANSmarket interest rate declines, the borrower will want
to repay their mortgage, hurts the lender because they will receive a smaller
amount
Defeasance Penalty - ANSborrower must replace mortgage loan with a set of
US Treasury securities that produce CFs equivalent to those on paid-off mortgage
(prepayment penalty)
Mezzanine Mortgage - ANSequity interest of the 2nd borrower is pledged,
commonly used in addition to the first mortgage to offer more debt financing
options
Financial Risk - ANSprobability that the NOI is not enough to cover the debt
service
Debt service - ANSthe timely payment on the principal and interest of your
mortgage, monthly payments
Default risk - ANSrisk of default, financial risk doesn't necessarily have to
mean default risk
Debt Coverage Ratio - ANS"cash flow cushion"
, DCR = NOI/ DS (debt service)
Loan to Value Ratio - ANSLTV = Loan Amount/ Acquisition Price
Debt Yield Ratio - ANSindicator of lender's mortgage "return"
DYR = NOI / Loan Amount
Sale-leaseback - ANSowner-user (bank, restaurant, drug store, etc.) sells
property to long term real estate investor, then leases the property back from the
investor and occupies it under long term net lease
Letter of Intent (LOI) - ANSloan application quote, includes loan amount
and what interest rate they will be using
Land Acquisition Loan - ANSfinance purchase of raw land, speculative
development, RISKY
Land Development loan - ANSready for development, less riskier than
acquisition, what they are going to build can be pledged as collateral
construction loan - ANSless riskier, finance vertical construction
Public Equity - ANSalmost all of public equity is from real estate investment
trusts (REITS)
Private Equity - ANSpension funds, life insurance, foreign investors, hedge
and mutual funds
Public Debt - ANScommercial mortgage backed securities
Special Allocations - ANSmanagement team get a larger proportion of the
profit relative to their initial investment because they are basically doing all of the
work, works out incentives of shareholders who don't do much work compared
with management
General Partnership - ANSnot commonly used in CRE, liable for all debts
(personally)
Limited Partnerships - ANSone or 2 general partners, then multiple limited
partners. GP = developer or operator partners, LP= limited liabilities, will not
participate in the business operations.
Flow through tax treatment (no corporate level taxation or double taxation)
