1. Lecture 15
Commercial Financing

2. Commercial Investment Organizations
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 Permanent 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