CHAPTER 2 BASIC VALUATION CONCEPTS
Download
Report
Transcript CHAPTER 2 BASIC VALUATION CONCEPTS
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.
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.
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 10years, and often include a ballon payment.
Commercial mortgages are often nonrecourse
loans.
COMMON TYPES OF
PERMANENT MORTGAGES
Balloon Mortgages
Common Loan Provisions
lock-out, prepayment, and yield
maintenance provisions
Floating Rate Loans
Installment Sale Financing
Example Commercial Mortgage Loan Terms
Rates – Fixed
Rates – Floating
Spreads over Treasuries on
Fixed Rate Loans
Spreads over LIBOR on
Floating Rate Loans
Maximum LTVR
Minimum Debt Service
Coverage
Loan Term
7.25-8.15%
6.60-7.60%
125-176 bp
100-200 bp
75%
1.15-1.20
1-10
PERMANENT MORTGAGES
WITH EQUITY PARTICIPATION
Participation Mortgages
income kickers
equity kickers
contingent interest
OTHER EQUITY
PARTICIPATION
ARRANGEMENTS
Joint Ventures
Sale-Leasebacks
THE BORROWER’S 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
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.
The Effect of Leverage
=
Initial LTVR
NOI in yr. 1
Debt Service
BTCF
Initial Equity
BTCF/Initial Equity
Mean IRR
0%
$1,272,500
---1,272,500
13,375,000
9.51%
10.68%
60%
80%
$1,272,500 $1,272,500
683,773
857,038
584,727
415,462
5,350,000 3,375,000
10.93%
12.31%
14.58%
17.84%
THE LOAN SUBMISSION
PACKAGE
Loan Application
Property Description and Legal Aspects
Cash Flow Estimates
Appraisal Report and Feasibility Study
LOAN UNDERWRITING
The Property and Borrower
Property Type, Quality, and Location
Tenant Quality and Lease Terms
Environmental Concerns
Borrower Experience and Resources
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
ACQUISITION, DEVELOPMENT, &
CONSTRUCTION LOANS
Land Purchase and Development Financing
Construction Financing
take-out commitments
gap loans
open-ended loans
mini-perm. loans