Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Seven Key Factors to Consider in a Real Estate Loan

Seven threshold factors must be considered when you are structuring a real estate financing. The seven factors are listed below with a more detailed explanation to follow.

1. Nonrecourse versus Recourse Liability: In the case of recourse, what, if any, are the limitations on the debtor's liability?
2. Fixed versus Variable versus Hybrid Loan: If fixed, what is the spread and what is the index over which the rate will be fixed? If variable, what are the program parameters in terms of index, spread, and rate caps? If hybrid, what are the details of the loan program?
3. Loan term: 3 years, 5 years, 10 years, or longer?
4. Loan Amount and the Loan-to-Value Ratio.
5. Amortization: What is the amortization time frame—for example, is there an interest-only feature for first two years or longer; what happens thereafter?
6. Prepayment Penalty: Is there a defeasance, a loss of yield, a declining percentage? When is the loan open for repayment and when is it open for repayment without a penalty?
7. Assumption Provisions: Is the loan assumable and, if so, under what conditions?

Liability

What is the difference between nonrecourse and recourse debt? With nonrecourse financing, if the borrower defaults, only the real property security for the loan may be used to satisfy the obligation. The lender may not go after the other assets of the obligor. In contrast, if the debt is of the recourse sort, the borrower is personally liable for the monies borrowed. Any and ...