CRECI Commercial Real Estate Finance 3 — Questions and Answers
Question 1: What does 'leverage' mean in commercial real estate investing?
- Using borrowed funds to increase the potential return on equity (Correct answer)
- The legal right to foreclose on a property
- The ratio of operating expenses to gross income
- The process of refinancing an existing loan
Correct answer: Using borrowed funds to increase the potential return on equity
Leverage amplifies returns by allowing an investor to control a larger asset with less equity, though it also increases risk.
Question 2: A property with a $2,000,000 loan has an annual debt service of $140,000 and a NOI of $175,000. What is the DSCR?
- 1.14
- 1.25 (Correct answer)
- 0.80
- 1.43
Correct answer: 1.25
DSCR = NOI / Debt Service = $175,000 / $140,000 = 1.25.
Question 3: What is a 'CMBS' loan?
- A private equity loan backed by commercial tenant leases
- A commercial mortgage that is pooled and securitized into bonds sold to investors (Correct answer)
- A construction-to-permanent loan for new commercial buildings
- A government loan program for small business owners
Correct answer: A commercial mortgage that is pooled and securitized into bonds sold to investors
CMBS (Commercial Mortgage-Backed Securities) loans are pooled, securitized, and sold as bonds, providing liquidity to commercial lenders.
Question 4: What does 'prepayment penalty' mean in commercial lending?
- A fee charged when a loan closes late
- A fee charged when the borrower pays off the loan before its maturity date (Correct answer)
- A charge for missing a scheduled payment
- A penalty for exceeding the loan-to-value limit
Correct answer: A fee charged when the borrower pays off the loan before its maturity date
Prepayment penalties compensate lenders for lost interest income when a borrower retires debt early.
Question 5: Which loan structure features interest-only payments during the loan term with the full principal due at maturity?
- Fully amortizing loan
- Interest-only (IO) loan (Correct answer)
- Graduated payment mortgage
- Negative amortization loan
Correct answer: Interest-only (IO) loan
An interest-only loan requires only interest payments during the term, with the entire principal balance due as a balloon at maturity.
Question 6: What is a 'construction loan' typically used for in commercial real estate?
- Refinancing an existing stabilized property
- Short-term financing to fund the construction of a new property (Correct answer)
- Acquiring a portfolio of income-producing properties
- Providing permanent long-term financing for retail centers
Correct answer: Short-term financing to fund the construction of a new property
Construction loans provide short-term capital to fund building costs, with draws released as construction milestones are met.
Question 7: In commercial real estate, what is a 'mini-perm' loan?
- A short-term loan used to bridge construction until the property stabilizes and qualifies for permanent financing (Correct answer)
- A 30-year fixed-rate commercial mortgage
- A government-subsidized loan for affordable housing
- A revolving line of credit secured by commercial property
Correct answer: A short-term loan used to bridge construction until the property stabilizes and qualifies for permanent financing
A mini-perm provides interim financing after construction, giving the borrower time to lease up and meet permanent lender requirements.
CRECI Commercial Real Estate Finance 3
What does 'leverage' mean in commercial real estate investing?