COMMERCIAL PROPERTY FINANCING

1
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.

2
COMMERCIAL PROPERTY FINANCING

• LEARNING OBJECTIVES
• Identify 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.

3
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.

4
COMMON TYPES OF PERMANENT MORTGAGES

• Balloon Mortgages
• Common Loan Provisions
• lock-out, prepayment, and yield maintenance
  provisions
• Floating Rate Loans
• Installment Sale Financing

5
Example Commercial Mortgage Loan Terms
6
PERMANENT MORTGAGES WITH EQUITY PARTICIPATION

• Participation Mortgages
• income kickers
• equity kickers
• contingent interest

7
OTHER EQUITY PARTICIPATION ARRANGEMENTS

• Joint Ventures
• Sale-Leasebacks

8
THE BORROWERS 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

9
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.

10
The Effect of Leverage
11
THE LOAN SUBMISSION PACKAGE

• Loan Application
• Property Description and Legal Aspects
• Cash Flow Estimates
• Appraisal Report and Feasibility Study

12
LOAN UNDERWRITING

• The Property and Borrower
• Property Type, Quality, and Location
• Tenant Quality and Lease Terms
• Environmental Concerns
• Borrower Experience and Resources

13
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

14
ACQUISITION, DEVELOPMENT, CONSTRUCTION LOANS

• Land Purchase and Development Financing
• Construction Financing
• take-out commitments
• gap loans
• open-ended loans
• mini-perm. loans