Commercial Financing

1
Lecture 15

• Commercial Financing

2
Lecture 15

• Commercial Investment Organizations

3
Commercial Investment Organizations

• Limited Partnerships
• Composed of a General Partner and Limited
  Partners
• Three primary advantages to a LP
• Tax benefits on individual tax returns
• Limited liability in lawsuits
• Limited partners do not participate in the
  management of investments
• Four tests of a Limited Partnership
• Continuity of the organization
• Centralization of management
• Limited Liability
• Transferability of interests

4
Commercial Investment Organizations

• General Partnership
• Three characteristics
• Test for continuity requires that partnership be
  dissolved if a partner dies, resigns, or leaves
  the partnership
• Each partner has unlimited liability for any
  obligations of the organization
• All members of the partnership have equal
  management rights to commit and bind the whole
  organization

5
Commercial Investment Organizations

• Corporation
• Can own assets as an organization
• Required to pay corporate income taxes
• Joint Ownership
• Individual Ownership

6
Lecture 11/ Chapter 10

• Commercial Lending

7
Basics of Commercial Lending

• Money lent for real estate that produces income
• Loan underwriting based on items such as
  projected incomes, historical earnings and credit
  of borrowers, location, supply/demand factors in
  the market, etc.
• Loans typically larger than residential loans, so
  terms will vary depending on property and
  borrower
• Negative v. Positive Leverage

8
Commercial Loan Payment Structures

• Constant Level Payments
• Fully amortizing can be paid monthly, quarterly,
  semi-annually, annually
• Term Payment
• Borrower pays debt balance at loan maturity, but
  pays interest portion over the life of the loan
  interest can be paid monthly, quarterly,
  semi-annually, annually

9
Commercial Loan Payment Structures

• Partial Payment with a Balloon
• Borrower able to delay a portion of debt until
  loan maturity
• Results in lower payment, and higher return over
  the loan duration
• Results in additional time to increase property
  values for re-sale or refinancing benefits at the
  time of loan maturity (repay debt balance)

10
Key Financial Standards

• Debt-Service Coverage Ratio (DSC)
• NOI / Annual Debt Obligation
• Loan-to-Value Ratio (LTV)
• Total Loan Amount / Property Value (Sales Price)
• Overall Capitalization (Cap) Rate
• NOI / Property Value (Sales Price)

11
Commercial Underwriting

• Factors of Underwriting
• 1. Borrower/Company
• 2. Project Feasibility
• (Value greater than development costs)
• 3. Expected Performance of Project

12
Commercial Second Mortgages

• Higher need in commercial markets due to larger
  required equity capital contributions
• Can be issued by a third party, subject to
  restrictions of the first mortgage
• Higher interest rates than first mortgages
  (higher risk from having second-lien rights)

13
Lecture 15

• Construction Finance

14
Construction Loans

• Construction Financing
• Short-Term
• Not a first-lien loan
• Borrower typically pays interest only during
  construction
• Lender pays contractor (in behalf of borrower) in
  draws
• Permanent Financing
• Long-Term
• Begin paying towards principal
• Takeout commitment
• Gap Financing (if necessary)
• Covers non-receipt of income between end of
  construction and occupancy stabilization of
  improvement