Commercial Real Estate Finance Flashcards

What does a 'lock-out period' mean in a commercial mortgage?

Answer: A period during which the borrower cannot prepay the loan at all

During a lock-out period, the lender prohibits any early repayment, protecting the lender's income stream for that duration.

What is a 'floating rate' loan in commercial real estate?

Answer: A loan whose interest rate adjusts periodically based on a benchmark index such as SOFR

Floating rate loans adjust with a reference rate (e.g., SOFR), so the borrower's payment fluctuates with market conditions.

Which of the following best describes 'preferred equity' in a commercial real estate capital stack?

Answer: Equity that receives a fixed preferred return before common equity but behind all debt holders

Preferred equity receives a set return priority over common equity but is subordinate to all debt, making it a hybrid risk/return position.

A property is purchased for $5,000,000 with a $3,500,000 loan. What is the Loan-to-Value (LTV) ratio?

Answer: 70%

LTV = Loan Amount / Property Value = $3,500,000 / $5,000,000 = 70%.

What is 'cash-out refinancing' in commercial real estate?

Answer: Refinancing an existing loan for a higher amount than the current balance to extract equity as cash

Cash-out refinancing allows owners to access equity growth by taking a new, larger loan and receiving the difference in cash.

What does 'interest rate cap' protect a floating rate borrower against?

Answer: An increase in the benchmark rate above a specified maximum level

An interest rate cap is a derivative that limits the borrower's exposure if the floating benchmark rate rises above the cap strike rate.

What is the 'break-even occupancy rate' for a commercial property?

Answer: The occupancy level at which income exactly covers operating expenses and debt service

Break-even occupancy is the point at which rental income covers all operating expenses and mortgage payments, with no profit or loss.