CRECI Commercial Real Estate Finance 2 — Questions and Answers
Question 1: What does the term 'amortization' refer to in a commercial real estate loan?
- The process of gradually paying down the loan principal over time (Correct answer)
- The lender's fee for originating the loan
- The penalty charged for early loan payoff
- The annual adjustment of the interest rate
Correct answer: The process of gradually paying down the loan principal over time
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?
- $1,300,000
- $3,076,923 (Correct answer)
- $1,538,462
- $2,600,000
Correct answer: $3,076,923
Property value = NOI / Cap Rate = $200,000 / 0.065 = $3,076,923.
Question 3: What is a 'balloon payment' in commercial real estate financing?
- A prepayment penalty assessed at loan closing
- A large lump-sum payment due at the end of the loan term (Correct answer)
- Monthly interest-only payments during the loan term
- An adjustable rate tied to a market index
Correct answer: A large lump-sum payment due at the end of the loan term
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?
- Loan-to-Value Ratio (LTV)
- Debt Service Coverage Ratio (DSCR) (Correct answer)
- Operating Expense Ratio (OER)
- Equity Yield Rate
Correct answer: Debt Service Coverage Ratio (DSCR)
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'?
- A first mortgage secured by the property
- A hybrid debt/equity instrument subordinate to senior debt but senior to equity (Correct answer)
- A government-backed loan for affordable housing
- A line of credit used for operating expenses
Correct answer: A hybrid debt/equity instrument subordinate to senior debt but senior to equity
Mezzanine financing fills the gap between senior debt and equity, typically structured as subordinated debt or convertible instruments.
Question 6: What is a 'recourse loan' in commercial real estate?
- A loan that allows the lender to pursue the borrower's personal assets if the property collateral is insufficient (Correct answer)
- A loan that can be assumed by a future buyer
- A loan with no prepayment penalty
- A government-guaranteed commercial mortgage
Correct answer: A loan that allows the lender to pursue the borrower's personal assets if the property collateral is insufficient
With a recourse loan, the lender can seek repayment beyond the collateral property by pursuing the borrower personally.
Question 7: Which of the following best describes a 'participating mortgage'?
- A mortgage shared equally between two lenders
- A loan where the lender receives a portion of income or appreciation in addition to interest (Correct answer)
- A government-insured commercial mortgage
- A mortgage that adjusts based on a benchmark rate
Correct answer: A loan where the lender receives a portion of income or appreciation in addition to interest
In a participating mortgage, the lender earns additional returns by sharing in the property's cash flow or appreciation beyond the base interest.
CRECI Commercial Real Estate Finance 2
What does the term 'amortization' refer to in a commercial real estate loan?