REA Real Estate Financing & Capital Markets 2

Question 1

In a real estate capital stack, which position carries the lowest risk and why?

Accepted Answer

Senior debt, because it has priority claim on cash flows and proceeds in foreclosure

Answer

Preferred equity, because it receives fixed distributions before common equity

Answer

Mezzanine debt, because it is secured by a pledge of equity interests

Answer

Common equity, because owners control operating and disposition decisions

Question 2

What is a 'construction-to-permanent loan' (C-to-P loan)?

Accepted Answer

Financing that converts from a short-term construction loan to a long-term permanent mortgage upon project completion

Answer

A loan that funds both land acquisition and vertical construction in separate tranches

Answer

A government-backed loan used exclusively for affordable housing development

Answer

A joint venture structure combining construction equity and permanent debt from the same lender

Question 3

What does 'defeasance' mean in commercial real estate lending?

Accepted Answer

Replacing the loan collateral with a portfolio of government securities that match the remaining debt payments

Answer

Selling the property subject to the existing mortgage without lender approval

Answer

Negotiating a discounted payoff of the loan balance with the lender

Answer

Converting a fixed-rate loan to a floating-rate structure at the borrower's option

Question 4

What is the 'equity dividend rate' (EDR) in real estate investment analysis?

Accepted Answer

Annual pre-tax cash flow divided by the equity invested, measuring cash return on equity

Answer

Total return on equity over the entire holding period including appreciation

Answer

The rate of return earned by the debt investor on the outstanding loan balance

Answer

Net operating income divided by total project cost before financing

Question 5

What is the primary risk of a 'floating-rate' loan for a real estate borrower?

Accepted Answer

Rising interest rates can increase debt service and reduce cash flow or create negative leverage

Answer

The loan will mature before the property stabilizes, creating refinancing risk

Answer

Fixed prepayment penalties prevent the borrower from refinancing into better terms

Answer

The lender can call the loan if net operating income falls below a stated covenant

Question 6

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

Accepted Answer

The property's going-in cap rate is lower than the loan's interest rate, meaning debt reduces equity returns

Answer

The equity investor loses money due to operational underperformance of the property

Answer

A property generates negative cash flow before debt service is applied

Answer

The cost of floating-rate debt exceeds the property's total return over the hold period