Real Estate Financing & Capital Markets Flashcards
6 cards from real REA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Real Estate Financing & Capital Markets flashcards as text
In a real estate capital stack, which position carries the lowest risk and why?
Answer: Senior debt, because it has priority claim on cash flows and proceeds in foreclosure
Senior debt sits at the top of the capital stack with first priority on income distributions and collateral proceeds, making it the lowest-risk position.
What is a 'construction-to-permanent loan' (C-to-P loan)?
Answer: Financing that converts from a short-term construction loan to a long-term permanent mortgage upon project completion
A C-to-P loan provides construction financing that automatically converts to a permanent mortgage once the project stabilizes, eliminating refinancing risk.
What does 'defeasance' mean in commercial real estate lending?
Answer: Replacing the loan collateral with a portfolio of government securities that match the remaining debt payments
Defeasance substitutes the real property collateral with Treasury or agency securities that generate cash flows matching the remaining loan payments, releasing the lien on the property.
What is the 'equity dividend rate' (EDR) in real estate investment analysis?
Answer: Annual pre-tax cash flow divided by the equity invested, measuring cash return on equity
The equity dividend rate (also called the cash-on-cash return) measures annual pre-tax cash flow as a percentage of total equity invested.
What is the primary risk of a 'floating-rate' loan for a real estate borrower?
Answer: Rising interest rates can increase debt service and reduce cash flow or create negative leverage
Floating-rate loans expose borrowers to rising SOFR or other benchmark rates, which increase monthly debt service and can turn positive leverage negative.
What does 'negative leverage' mean in real estate investing?
Answer: The property's going-in cap rate is lower than the loan's interest rate, meaning debt reduces equity returns
Negative leverage occurs when the cap rate falls below the mortgage constant, meaning financing reduces rather than enhances the equity investor's return.