Commercial Real Estate Interactive Course

Conventional Commercial Mortgages

• Term: Typically 5-10 years with 15-30 year amortization
• LTV Ratio: Usually 65-75% of property value
• Interest Rate: Fixed or variable, based on market indices plus spread
• Recourse: May be full or limited recourse depending on borrower strength
• Providers: Commercial banks, credit unions, life insurance companies

CMBS Loans (Commercial Mortgage-Backed Securities)

• Term: Typically 5-10 years with 25-30 year amortization
• LTV Ratio: Up to 75% of property value
• Interest Rate: Generally fixed rate
• Recourse: Non-recourse with standard carve-outs
• Characteristics: Loans are pooled, securitized, and sold to investors
• Considerations: Less flexible terms, prepayment penalties, defeasance

Agency Loans (Fannie Mae, Freddie Mac, HUD/FHA)

• Property Types: Primarily multifamily and healthcare
• Term: 5-35 years depending on program
• LTV Ratio: Up to 80-85% for multifamily
• Interest Rate: Competitive fixed and variable rates
• Benefits: Higher leverage, longer terms, competitive rates
• Considerations: Stringent underwriting, longer approval process

Bridge Loans

• Purpose: Short-term financing for acquisitions, repositioning, or stabilization
• Term: 1-3 years, often with extension options
• LTV Ratio: Up to 75-80% of purchase price or value
• Interest Rate: Higher than permanent financing (typically 200-400 basis points above prime)
• Providers: Private lenders, debt funds, some banks
• Exit Strategy: Refinance with permanent loan or sale

Senior Debt

• Position: First lien position with priority claim on property
• Typical LTV: 50-75% of property value
• Risk/Return: Lowest risk, lowest return in the capital stack
• Providers: Banks, CMBS lenders, life insurance companies, agency lenders

Mezzanine Debt

• Position: Subordinate to senior debt, secured by ownership interests
• Typical Position: 75-85% of capital stack
• Risk/Return: Higher risk and return than senior debt
• Characteristics: Often includes equity participation or conversion rights
• Providers: Specialized mezzanine lenders, debt funds, opportunity funds

Preferred Equity

• Position: Senior to common equity, junior to debt
• Typical Position: 85-90% of capital stack
• Risk/Return: Higher risk and return than mezzanine debt
• Characteristics: Fixed preferred return, potential equity participation
• Providers: Private equity firms, REITs, high-net-worth individuals

Common Equity

• Position: Most junior position in capital stack
• Typical Position: 10-35% of capital stack
• Risk/Return: Highest risk, highest potential return
• Characteristics: Ownership control, unlimited upside potential
• Providers: Sponsors, private equity, joint venture partners

Loan-to-Value Ratio (LTV)

Formula: Loan Amount ÷ Property Value

Typical Range: 65-75% for conventional loans

Significance: Lower LTV indicates less leverage and lower risk for lender

Debt Service Coverage Ratio (DSCR)

Formula: Net Operating Income ÷ Annual Debt Service

Typical Requirement: 1.25x to 1.35x minimum

Significance: Measures property's ability to cover debt payments

Debt Yield

Formula: Net Operating Income ÷ Loan Amount

Typical Requirement: 8-10% minimum

Significance: Indicates return lender would receive if they foreclosed immediately