CRECI Commercial Real Estate Finance 3

Question 1

What does 'leverage' mean in commercial real estate investing?

Accepted Answer

Using borrowed funds to increase the potential return on equity

Answer

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?

Accepted Answer

1.25

Answer

DSCR = NOI / Debt Service = $175,000 / $140,000 = 1.25.

Question 3

What is a 'CMBS' loan?

Accepted Answer

A commercial mortgage that is pooled and securitized into bonds sold to investors

Answer

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?

Accepted Answer

A fee charged when the borrower pays off the loan before its maturity date

Answer

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?

Accepted Answer

Interest-only (IO) loan

Answer

An interest-only loan requires only interest payments during the term, with the entire principal balance due as a balloon at maturity.

(CRECI) Commercial Real Estate Certification Institute Practice Test