REA Real Estate Financing & Capital Markets

Question 1

What is a 'debt service coverage ratio' (DSCR) and why do lenders use it?

Accepted Answer

NOI divided by annual debt service; measures a property's ability to cover mortgage payments

Answer

Total revenue divided by total expenses; measures overall operating efficiency

Answer

Net income divided by equity invested; measures the return on equity

Answer

Gross rent divided by purchase price; measures the income multiple

Question 2

What distinguishes a 'recourse' loan from a 'non-recourse' loan in commercial real estate?

Accepted Answer

Recourse loans allow the lender to pursue the borrower's personal assets if the property value is insufficient; non-recourse loans limit recovery to the collateral

Answer

Recourse loans have floating interest rates while non-recourse loans have fixed rates

Answer

Non-recourse loans require larger down payments than recourse loans

Answer

Recourse loans are only available for construction financing, not permanent loans

Question 3

What is 'mezzanine financing' in real estate capital structure?

Accepted Answer

Subordinate debt secured by a pledge of equity interests, sitting between senior debt and equity

Answer

A short-term bridge loan used to finance acquisitions prior to permanent financing

Answer

A form of preferred equity that receives dividends before common equity distributions

Answer

Government-backed financing through agencies such as Fannie Mae or Freddie Mac

Question 4

A commercial real estate loan has an LTV of 65% and DSCR of 1.30x. What does this tell an analyst?

Accepted Answer

The loan is conservatively structured with low leverage and income well above debt service

Answer

The property is highly leveraged and at risk of default

Answer

The property's equity cushion is only 35% and income barely covers debt

Answer

The loan requires additional collateral or a personal guarantee

Question 5

What is a 'CMBS loan' and what is its primary advantage for borrowers?

Accepted Answer

A commercial mortgage-backed securities loan pooled and sold to bond investors, offering competitive fixed rates

Answer

A government-insured loan program for multifamily properties administered by HUD

Answer

A short-term construction loan with an interest reserve funded at closing

Answer

A floating-rate portfolio loan held on a bank's balance sheet

Question 6

What is 'yield maintenance' in the context of commercial real estate loan prepayment?

Accepted Answer

A prepayment penalty that compensates the lender for lost interest by making them whole relative to Treasury yields

Answer

A clause requiring the borrower to maintain a minimum NOI yield throughout the loan term

Answer

An interest rate cap that prevents the loan rate from exceeding a stated maximum

Answer

A lender's requirement that net operating income grow at a minimum annual rate