Commercial Real Estate Finance Flashcards

What does the term 'amortization' refer to in a commercial real estate loan?

Answer: The process of gradually paying down the loan principal over time

Amortization is the scheduled repayment of loan principal over the loan term through periodic payments.

A commercial property has a NOI of $200,000 and the market cap rate is 6.5%. What is the estimated property value?

Answer: $3,076,923

Property value = NOI / Cap Rate = $200,000 / 0.065 = $3,076,923.

What is a 'balloon payment' in commercial real estate financing?

Answer: A large lump-sum payment due at the end of the loan term

A balloon payment is a large final payment due at loan maturity, common when the loan amortizes over a longer period than its actual term.

Which ratio measures a borrower's ability to service debt from property income?

Answer: Debt Service Coverage Ratio (DSCR)

DSCR = NOI / Annual Debt Service, and lenders typically require a minimum of 1.20–1.25 to ensure sufficient income.

In commercial real estate, what is 'mezzanine financing'?

Answer: A hybrid debt/equity instrument subordinate to senior debt but senior to equity

Mezzanine financing fills the gap between senior debt and equity, typically structured as subordinated debt or convertible instruments.

What is a 'recourse loan' in commercial real estate?

Answer: A loan that allows the lender to pursue the borrower's personal assets if the property collateral is insufficient

With a recourse loan, the lender can seek repayment beyond the collateral property by pursuing the borrower personally.

Which of the following best describes a 'participating mortgage'?

Answer: A loan where the lender receives a portion of income or appreciation in addition to interest

In a participating mortgage, the lender earns additional returns by sharing in the property's cash flow or appreciation beyond the base interest.