CHAPTER 18

Investment Decisions: Ratios

a. is the reciprocal of the net income multiplier.

3. The operating expense ratio:

d. serves as an initial evaluation of the adequacy of an investment’s expected cash flows.

6. Assume a retail shopping center can be purchased for $5.5 million. The center’s first year NOI is expected to be $489,500. A $4,000,000 loan has been requested. The loan carries a 9.25 percent fixed contract rate, amortized monthly over 25 years with a 7-year term. What will be the property’s (annual) debt coverage ratio in the first year of operations?

You are considering purchasing an office building for $2,500,000. You expect the potential gross income (PGI) in the first year to be $450,000; vacancy and collection losses to be 9 percent of PGI; and operating expenses and capital expenditures to be 38 percent and 4 percent, respectively, of effective gross income (EGI).

8. What is the implied first-year overall capitalization rate?

• Acquisition price: $800,000

• Loan-to-value ratio: 75%

You are considering the purchase of an office building for $1.5 million today. Your expectations include the following: first-year potential gross income of $340,000; vacancy and collection losses equal to 15 percent of potential gross income; operating expenses equal to 40 percent of effective gross income and capital expenditures equal 5 percent of EGI. You expect to sell the property five years after it is purchased. You estimate that the market value of the property will increase four percent a year after it is purchased and you expect to incur selling expenses equal to 6 percent of the estimated future selling price.

1. What is estimated effective gross income (EGI) for the first year of operations?

Solution: The overall cap rate is 10.6 percent ($158,950 / $1,500,000)

4. An investment opportunity having a market price of $1,000,000 is available. You could obtain a $750,000, 25-year mortgage loan requiring equal monthly payments with interest at 7.0 percent. The following operating results are expected during the first year.

a. Gross income multiplier

Solution: Market price / Effective gross income = $1,000,000 / $200,000 = 5.0

d. Debt coverage ratio

Solution: NOI / Annual debt service = $100,000 / $63,610 = 1.57

Note: Equity investment = Acquisition price – loan amount

= $1,000,000 - $750,000

= $20,160

NOI / Market price = $20,160 / $200,000 = 10.08 percent

Debt service = $12,436, as calculated below

Before-tax cash flow = NOI - Debt service

= 12.87 percent

d. What is the debt coverage ratio?

Solution: Debt service must be such that the following relationship holds:

or,

$189,130 = loan amount

6. Why do Class B properties generally sell at higher going-in cap rates than Class A properties?

What is the overall capitalization rate?

10. Explain why income property cash flow is not the same as taxable income.

Solution: For several reasons, the actual net cash flow generated by a rental property investment is different than the amount of income the owner must report for federal income tax purposes. First and foremost, a deduction for depreciation is allowed in the calculation of taxable income from annual operations; however, the owner does not “write a check” for depreciation on an annual basis. This reduces taxable income relative to the actual cash flow. The same is true for amortized financing expenses. Conversely, the owner often does make mortgage payments that include both interest and principal amortization. However, only the interest portion of the mortgage payment is tax deductible. The principal portion is, therefore, a cash outflow that is not tax deductible.

Test Questions

1. A real estate investment is available at an initial cash outlay of $10,000, and is expected to yield cash flows of $3,343.81 per year for five years. The internal rate of return (IRR) is approximately:

b. is the value now of all net benefits that are expected to be received in the future.

d. is also correct.

6. What term best describes the maximum price a buyer is willing to pay for a property?

a. Investment value

9. What is the IRR, assuming an industrial building can be purchased for $250,000 and is expected to yield cash flows of $18,000 for each of the next five years and be sold at the end of the fifth year for $280,000?

c. 9.20 percent

Solution: Direct capitalization models require an estimate of stabilized income for one year. DCF models require estimates of net cash flows over the entire expected holding period. In addition, the cash flow forecast must include the net cash flow expected to be produced by the sale of the property at the end of the expected holding period. Finally, the appraiser must select the appropriate yield (required IRR) at which to discount all future cash flows or to use as the hurdle rate in an IRR analysis.

2. Why might a commercial real estate investor borrow to help finance an investment even if she could afford to pay 100 percent cash?

Solution:

5. State, in no more than one sentence, the condition for favorable financial leverage in the calculation of NPV.

• NOI is expected to be $130,000 in year 1 with 5 percent annual increases.

• The purchase price of the property is $720,000.

b. Calculate the unlevered net present value (NPV).

Solution:

The IRR is 7.84 percent. Based on a going-in levered rate of return on the project of 10 percent, the NPV equals ($10,246) and the project should not be undertaken.

9. You are considering the acquisition of a small office building. The purchase price is $775,000. Seventy-five percent of the purchase price can be borrowed with a 30-year, 7.5 percent mortgage. Payments will be made annually. Up-front financing costs will total three percent of the loan amount. The expected before-tax cash flows from operations--assuming a 5-year holding period—are as follows:

10. You are considering the purchase of an apartment complex. The following assumptions are made:

• The purchase price is $1,000,000.

• The market value of the investment is expected to increase 4 percent per year.

• Selling expenses will be 4 percent.

• The annual interest rate on the mortgage will be 8.0 percent.

• Financing costs will equal 2 percent of the loan amount.

Solution:

c. Calculate the net present value of this investment, assuming no mortgage debt. Should you purchase? Why?

e. Calculate the monthly mortgage payment. What is the total per year?

Solution: Monthly payment = $5,136.35 as calculated below:

Unpaid mortgage balance in year 2 = $687,820

Unpaid mortgage balance in year 3 = $680,961

Principal reduction in year 2 = $694,152 - $687,820 = $6,332

Principal reduction in year 3 = $687,820 - $680,961 = $6,859

Interest paid in year 2 = $61,636 - $6,332 = $55,304

Interest paid in year 3 = $61,636 - $6,859 = $54,777

Up-front financing costs (0.02 x $700,000) = $14,000

Equity investment = $1,000,000 - $700,000 + $14,000 = $314,000

l. Calculate the levered net present value of this investment. Should you purchase? Why?

Solution:

Solution: Levered IRR = 25.02 percent; Decision: Purchase the property because IRR > 14 percent, the required return.

n. Calculate, for the first year of operations, the: (1) overall (cap) rate of return, (2) equity dividend rate, (3) gross income multiplier, (4) debt coverage ratio.

4. Debt coverage ratio = NOI / Debt service = $111,150 / $61,636 = 1.8

11. The expected before-tax IRR on a potential real estate investment is 14 percent. The expected after-tax IRR is 10.5 percent. What is the effective tax rate on this investment?

• 100% equity financing is used to purchase the property

• The property is sold at the end of year 4 for $860,000 with selling costs of 4 percent.

Again, with a cash outflow of $720,000 at time zero (CF₀), a required unlevered rate of return of 14 percent, and using the cash flow (“CF”) key of your calculator, the unlevered net present value (NPV) = 195,769.78

Chapter 9

2. Which of these aspects of a mortgage loan will be addressed in the note rather than in the mortgage?

a. Prepayment penalty

5. Which if these points in a mortgage loan would be addressed in the mortgage (possibly in the note as well)?

d. Escrows

8. If the lender in a standard first mortgage wishes to foreclose cost effectively, it is crucial to have which clause in the mortgage:

a. Acceleration clause

11. The Real Estate Settlement Procedures Act does which of these:

e. All of the above.

14. The most internationally oriented index rate for adjustable rate mortgages is:

c. A LIBOR rate.

17. Which of these statements is true about mortgage loans for income producing real estate?

e. All of the above.

20. Which statement is correct about the right of prepayment of a home mortgage loan?

b. Most home mortgage loans have the right of prepayment without charge, but not all, and the borrower should check the loan carefully.

Solution: The mortgage lender is entitled to the value of the mortgage indebtedness under both Chapter 7 and Chapter 13 because their claim has priority. However, Chapter 13 is essentially a debt workout plan that will most likely delay the efforts by a lender to foreclose on the property. Delays may cost the lender opportunity costs through uncollected interest and legal expenses. Addtionally, the value of the property may deteriorate due to neglect during this process.

3. Residential mortgage terms (mortgage notes) have become increasingly uniform as the mortgage market has become more national and efficient. Is there any downside to this for the homeowner?

Solution: The purchase of a home is typically the largest financial transaction undertaken by most individuals. Unlike a car, the purchase of a home typically cannot be readily undone by quickly selling the property to another party. Mortgage financing is normally more complex than automobile financing. Mortgage financing requires some basic understanding of law, and, without consumer protection laws, the lender has a disproportionate advantage over the borrower in this transaction. From a public policy perspective, federal regulation prohibits discrimination and financially abusive practices.

6. For your own state, determine whether:

Based on this information can you judge your state is relatively debtor friendly or borrower friendly?

Solution: For the student to decide as answers to the above questions vary by state.

• The deed of trust is cancelled when the debt is paid.

The primary differences between a mortgage and a deed of trust occur if the home is foreclosed. The trustee has power of sale. Therefore, if your loan becomes delinquent, the lender will give the trustee proof of the delinquency and ask the trustee to initiate foreclosure proceedings.

d. Home, 80 percent.

2. The dominant loan type originated and kept by most depository institutions is the:

d. Reverse annuity mortgage.

5. A jumbo loan is:

d. 100 percent.

8. Conforming conventional loans are loans that:

a. Net benefit analysis.

11. Probably the greatest contribution of FHA to home mortgage lending was to:

2. Explain the potential tax advantages associated with home equity loans:

Solution: Unlike interest on consumer debt, interest paid on the first $100,000 of a home equity loan is fully deductible for federal and, in some cases, state income tax purposes. By including the interest paid on a home equity loan as an itemized deduction, taxpayers can effectively reduce the cost of this loan on an after-tax basis.

5. Explain the maturity imbalance problem faced by savings and loan associations that hold fixed-payment mortgages as assets.

Solution: Savings and loan associations historically have used short-term savings deposits to fund long-term, fixed rate home loans. This mismatch in the maturity of assets and liabilities exposes them to severe interest rate risk. Consequently, the cost of funds from interest paid on short-term savings deposits may rise faster than the yield on their investments, or issued loans. A benefit of adjustable rate mortgages is that they closely track an institution’s cost of funds.

7. 1. What is the monthly payment on this RAM?

   2. Fill in the following partial loan amortization table:

2. The amortization is as follows:

3. The balance at the end of 12 years is $100,000.

8. 3. What should be the monthly payment on the new loan?

   4. Should you refinance today if the new loan is expected to be outstanding for five years?

4. If the new loan is to be paid off in five years, the balance of the original loan after year ten is $90,938.02, calculated with the following inputs: (N = 240, I = 0.8333, PMT = 877.57, and FV = 0.

Answer based on net benefit analysis:

The cost of refinancing is $3,000 plus 1,931.49 (0.02 x 96,574.32), or 4,931.49.

The NPV of refinancing the loan is $2,813.12 (7,744.61 – 4,931.49). Therefore, you should refinance today if the new loan is expected to be outstanding for five years.

CHAPTER 11

Sources of Funds for Residential Mortgages

d. Rapid consolidation.

3. Currently, which type of financial institution in the primary mortgage market provides the most funds for the residential (owner-occupied) housing market?

c. Monthly principal, interest, property taxes, and hazard insurance.

6. The most profitable activity of residential mortgage bankers is typically

c. Private conduits.

9. The reduced importance of certain institutions in the primary mortgage market has been largely offset by an expanded role for others. Which has diminished and which has expanded?

1. What is the primary purpose of the risk-based capital requirements that Congress enacted as part of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)?

Solution: The goal of the Financial Institutions Reform, Recovery, and Enforcement Act is to charge banks and thrifts for risky lending practices and to reward safer practices. It supplanted the conventional regulatory approach of simply attempting to prohibit risky behavior even though banks and thrifts found the risk-taking profitable.

3. Describe the basic activities of Fannie Mae in the secondary mortgage market. How are these activities financed?

Solution: Fannie Mae purchases both conventional and government-underwritten residential mortgages from mortgage companies, commercial banks, savings and loan associations, and other approved lenders. Part of these acquired mortgages are combined into packages or mortgage pools, mortgage-backed securities are written against the pools, and the MBSs are then sold to investors. Another part of the acquired mortgages are “held in portfolio.”

Solution: There were at least three fundamental problems with residential mortgage brokerage as practiced in the years up to 2009. First, brokers were compensated at the beginning of a transaction and had no continuing responsibility or liability. Thus they could not be held financially accountable for errors or bad practices. Second, there were few, if any, qualification requirements enforced for a person to act as a broker. Third, brokers tended to be given larger fees for higher cost loans, encouraging them to lead borrowers toward high-cost loans. Some states, and the Congress, have passed legislation both to impose national broker qualification requirements and probably to prevent fees that increase with the cost of the loan. The effect of this legislation remains to be seen.

6. Describe the mechanics of warehouse financing in mortgage banking..

Solution: Three clienteles for subprime loans are borrowers with inadequate income documentation, borrowers who want 100 percent or greater financing, and borrowers who have a poor credit record.

9. You have just signed a contract to purchase your dream house. The price is $120,000 and you have applied for a $100,000, 30-year, 5.5 percent loan. Annual property taxes are expected to be $2,000. Hazard insurance will cost $400 per year. Your car payment is $400, with 36 months left. Your monthly gross income is $5,000. Calculate:

   5. The total obligations (back-end) ratio.

Solution:

5. 23.36% ((767.79 + 200 + 400)/5,000)

10. Contrast automated underwriting with the traditional “Three Cs” approach

CHAPTER 16

Commercial Mortgage Types and Decisions

2. Consider a 30-year, 7 percent, fixed rate, fully amortizing mortgage with a yield maintenance provision. Relative to this mortgage, a 10-year balloon mortgage with the same interest rate and yield maintenance provisions will primarily reduce the lender’s:

a. Interest rate risk.

5. Which of the following statements is most accurate?

b. Joint ventures usually decrease the amount of equity capital the developer/borrower must invest in the project.

8. Which of these ratios is an indicator of the financial risk for an income property?

d. Both a and b, but not c

Study Questions

1. Discuss several differences between long-term commercial mortgages and their residential counterparts.

Solution:

1. Financial risk refers to the risk that NOI will be less than debt service. A positive correlation exists between the amount of debt service and financial risk.

Solution: A lockout provision prohibits prepayment of a commercial mortgage over a specified period after the origination of the mortgage. This provision reduces a lender’s reinvestment risk from prepayments in falling interest rate environments.

A yield-maintenance agreement is another mechanism for creating a prepayment penalty. If interest rates decline and borrowers could prepay at par, lenders would have to reinvest the remaining loan balance at current (lower) rates. The prepayment penalty paid by borrowers with a yield maintenance agreement is set equal to the present value of the lender’s loss resulting from reinvesting the remaining loan balance at the lower market rates. The yield-maintenance provision restores the lender’s position as if rates had never changed and no prepayment had occurred.

5. 3. What will be the balance of the loan at the end of year 3?

   4. Assume that interest rates have fallen to 4.5% at the end of year 3. If the remaining mortgage balance at the end of year 3 is refinanced at the 4.5 percent annual rate, what would be the new monthly payment assuming a 27-year amortization schedule?

   9. At the end of year 3 (beginning of year 4), what will be the present value of the difference in loan balances at the end of year 7, discounting at an annual rate of 4.5 percent?

   10. At the end of year 3 (beginning of year 4), what will be the total present value of lost payments in years 4-7 from the lender’s perspective?

3. The balance of the loan at the end of year 3 is $480,420 (solving for the present value of the remaining payments: N=324, I =6/12, PV= ?, PMT = 2,997.75, and FV=0).

4. The new monthly payment assuming a 27-year amortization schedule is $2,564.10 (n=324, I =4.5/12, PV = 480,420.35, and FV = 0).

9. At the end of year 3 (beginning of year 4), the present value of the differences in loan balances at the end of year 7, discounting at an annual rate of 4.5 percent, is $6,515 (n = 48, I = 4.5/12, PMT = 0, and FV = 7,797).

10. At the end of year 3 (beginning of year 4), the total present value of lost payments in years 4-7 from the lender’s perspective is $19,017 (n = 48, I = 4.5/12, PMT = 433.65, and FV = 0)

7. 1. What is the average annual spread on mortgage rates relative to the 10-year Treasury securities?

   2. What is the correlation between annual mortgage rates and Treasury yields over the 1990-2005 period?

Solution: Loan application packages typically include the following:

• Loan application – the specific document that serves as a request for funds.

9. List at least six characteristics of a commercial loan application that the lender should carefully evaluate.

Solution: Characteristics of a commercial loan application that the lender should carefully evaluate include the property type, location, tenant quality, lease terms, property management, building quality, environmental concerns, and borrower quality.

11. You are considering the purchase of an industrial warehouse.

    1. Calculate the overall rate of return (or “cap rate”)

2. The debt coverage ratio is computed below:

DCR = NOI/DS = 108,000/42,000 = 2.57

Solution: The existence of a single lender and a single application process simplifies the financing process. Miniperm loans enable developers to proceed with construction without long-term financing. A miniperm loan is an attractive financing option if the developer expects to sell the project or refinance into a permanent loan before the term of the miniperm expires.

14. You are considering purchasing an office building for $2,500,000.

Solution:

1. PGI $450,000

DS (138,170)

BTCF $ 99,340

CHAPTER 17

SOURCES OF COMERCIAL DEBT AND EQUITY CAPITAL

Test Problems

1. Double taxation is most likely to occur if the commercial properties are held in the form of a(n):

c. Limited partnership

4. Real estate syndicates traditionally have been legally organized most frequently as:

a. limited partnerships

7. Which statement is false concerning the limited partnership of ownership?

c. Large office building loan (nonconstruction)

10. Which of these financial firms is the least likely to invest in a large, long-term mortgage loan on a shopping center?

2. Why are many pension funds reluctant to invest in commercial real estate?

Solution: Pension funds have historically viewed real estate as too risky, difficult to manage, and illiquid. Addtionally, the lack of available information for performing quantitative investment analysis has also contributed to the reluctance of pension funds to invest in real estate.

5. Briefly explain a commingled fund. Who are the investors in these funds and why do these investors use commingled funds for their purchases?

Solution: A commingled fund is a means for pension funds that do not possess sufficient in-house real estate expertise to invest in real estate. Pension funds contribute funds to a real estate fund manager who pools, or commingles, these funds with finds from other pension funds to purchase real estate assets.

7. Explain what is meant by the double taxation of income.

Solution: Double taxation refers to the taxation of income at both the entity and investor level. For example, a C corporation pays tax on its income, which reduces the amount available to be distributed to shareholders by the amount of the entity-level tax. Shareholders are then taxed on the income distributed to them in the form of dividends, resulting in the double taxation of the income generated by the corporation.

A REIT is a C corporation and but, unlike the standard C corporation, does not pay income tax at the entity level if it adheres to a set of conditions outlined in the Internal Revenue Code. A disadvantage of the REIT ownership form is that tax losses do not pass through to shareholders.

Real estate limited partnerships are not subject to double taxation because income tax is not assessed at the entity level. Limited partnerships may allocate tax losses to partners, but the ability of limited partners to use tax losses is potentially limited by passive activity loss restrictions.

Solution: Equity REITs invest in and operate commercial properties. Mortgage REITs purchase mortgage obligations (typically commercial) and thus become, effectively, real estate lenders. Hybrid REITs invest a significant percentage of their assets in both properties and mortgages.

12. Define funds from operations (FFO) and explain why this measure is often used instead of GAAP net income to quantify the income-producing ability of a real estate investment trust.

+ Amortization of tenant improvements

- Gains/losses from infrequent and unusual events

Test Problems

1. The most typical adjustment interval on an adjustable rate mortgage (ARM) once the interest begins to change is:

d. An interest-only mortgage.

4. The dominant loan type originated by most financial institutions is the:

e. An inflation index.

7. The annual percentage rate (APR) was created by:

Loan: $100,000

Interest rate: 7 percent

c. EBC accounts for additional up-front expenses that lender’s yield does not.

Study Questions

First, the loan payment must be calculated. The loan payment is $665.30, as solved below:

The balance at the end of four years is $95,474.55, which is calculated by entering the following data into a financial calculator.

Solution: The monthly payment is $550.32 and the balloon payment is $69,358.07.

The payment is calculated using the following calculator keystrokes:

Payment frequency: monthly

Loan amount: $160,000

3. Calculate the lender’s yield with prepayment is five years.

4. Calculate the effective borrowing costs with prepayment in five years.

3. In order to calculate the lender’s yield, the loan balance remaining at the end of year five must first be calculated”

The remaining balance is $128,108.67. With this information, the lender’s yield is 9.34 percent as calculated below:

7. A homeowner is attempting to decide between a 15-year mortgage loan at 5.5 percent and a 30-year loan at 5.90 percent. What would you advise? What would you advise if the borrower also has a large amount of credit card debt outstanding at a rate of 15 percent?

Solution: If the borrower does not have a significant amount of debt at a rate well above the rates on the loan, then the difference in mortgage rates should be viewed as a maturity premium difference, and the borrower can consider the loans as equivalent on a purely financial basis. If the borrower owes significant amounts of high interest consumer debt, then the longer-term loan is preferable. It will have a lower present value (present cost) discounted at the borrower’s opportunity cost. In other words, if the opportunity costs of the household are substantially greater than the mortgage interest rate, the household will be better off with the longer-term mortgage.

Annual rate cap: 2%

Life-of-loan cap: 5%

Loan term in years: 30

Given these assumptions, calculate the following:

5. Loan balance end of year 2

6. Year 3 contract rate

3. Assuming the annual cap applies to the teaser rate, the interest rate in year two is 5.50 plus 2.00, or 7.50 percent.

4. With a remaining term of 29 years, interest rate of 7.5 percent and a balance of $147,979.41, the new payment in year 2 is $1,044.32, calculated on a financial calculator with the following keystrokes.

Loan Amount: $100,000

Interest rate: 10 percent annually

4. What is the effective borrowing cost on the loan if the lender charges 3 points at origination and the loan is prepaid at the end of year 9?

Solution:

CHAPTER 21

Enhancing Value through Ongoing Management

Test Problems

1. The Institute of Real Estate Management (IREM) awards which of the following designations?

c. A fiduciary responsibility

4. Which of these is not typically a responsibility of a property manager?

c. Net operating income.

7. The following are necessary for a lease to be valid, except:

c. When the site value, assuming a new use, exceeds the value of the site under its existing use, plus the cost of demolition.

10. For non-real estate corporations, which of the following is not a potential advantage of a real estate sale-leaseback?

2. What should be included as costs to be matched by value added after rehabilitation?

Solution: An improvement, such as rehabilitation, should be undertaken only if the value added to the property exceeds the cost of improvements, which include material, labor, the contractor’s profit, architect’s fees, and an allowance for contingencies. If the rehab work prevented the owner from renting all or part of the structure for some period of time, the present value of the lost net rental income should be included as a cost.

4. What factors can change after rehabilitation of a property to produce a higher “after” value than “before” value?

Solution: The rehabilitation of a property can result in a larger net operating income, an extension of the building’s remaining economic life, or a reduction in discount rate used to calculate the present value of future income.

7. Define deferred maintenance and list some examples.

Solution: Deferred maintenance describes costs related to ordinary maintenance that is not performed at the time a problem is detected. Examples of deferred maintenance include needed roof repairs, HVAC & control systems that are not functioning efficiently, floor repairs, old paint, and broken windows.

10. In the real estate asset management/investment advisory business, why has performance-based management replaced, or at least supplemented, the “traditional” scheme for compensating some asset managers?

Solution: The practice of compensating asset managers based on the value of net assets managed creates an agency problem because managers have the incentive to acquire and hold assets--rather than maximizing the investor’s rate of return. Establishing management compensation based on maximizing the investor’s rate of return better aligns the interests of the manager and investor/principal.

CHAPTER 23

DEVELOPMENT: THE DYNAMICS OF CREATING VALUE

Test Problems

1. The first step in the process of development is to:

a. Feasibility analysis, refinement, and testing

4. All of the following are valuable in facilitating the development permitting process except:

c. Land planner.

7. Soft costs include all except:

d. Soils engineer.

10. When construction costs exceed the amount of the construction loan, a developer frequently will seek to cover the “gap” with:

2. List at least five ways that a developer may attempt to reduce the risks of the permitting process.

Solution: A developer may attempt to reduce the risks associated with the permitting process in many ways. The developer may offer provisions for buffering the surrounding land from the proposed project. The developer may provide an improvement, such as a park, that will benefit the local neighborhood. The developer should be prepared to negotiate with the land use authorities and neighborhood owners groups. The developer should establish a positive relationship with the local regulatory authorities and keep them informed throughout the development process.

5. Why, in some cases, must a developer begin leasing efforts even before the design is complete?

Solution: Depending on the property type, leasing efforts should begin before the completion of the design stage. For example, leasing efforts for office buildings and other facilities with long-term tenants should typically begin well before the tenant actually requires space. Presales are also frequently required for obtaining financing for condominium projects. Retail and office projects may not be viable without securing anchor tenants. Take-out commitments for construction loan financing frequently require preleasing to be in process.

7. Explain the possible advantages of miniperm financing as opposed to traditional construction financing followed by “permanent” financing.

Solution: A miniperm loan serves as a construction loan for a few years after the property is completed. The typical term for a minperm loan is five years.