CRECI Commercial Real Estate Finance 2

Question 1

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

Accepted Answer

The process of gradually paying down the loan principal over time

Answer

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

Question 2

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

Accepted Answer

$3,076,923

Answer

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

Question 3

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

Accepted Answer

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

Answer

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.

Question 4

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

Accepted Answer

Debt Service Coverage Ratio (DSCR)

Answer

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

Question 5

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

Accepted Answer

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

Answer

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

(CRECI) Commercial Real Estate Certification Institute Practice Test