Commercial Real Estate Loan Request exercise:

A Borrower approached you and your bank to borrow funds to build an Office/Warehouse/Shop space in the industrial-commercial district of a small metropolitan community.

The building will be built over the next 12 months on a 2.5 acre parcel of improved commercial land. The purpose of the building is to house a commercial tenant that needs additional space and has signed a ten year fixed lease for a rent of $11,000.00 per month and will be responsible for any additional tenant improvement, maintenance, and additional capital equipment attached to the property (ie lifts, gates, fencing, and freight docks.

The appraised value of the land and building when completed will be $1,150,000. The borrower owns the building lot outright, but will rely on lease payments to service the term note.

Generally, these project are in three phases: Construction; Mezzanine; and Term credit.

Questions:

• Will you finance the construction loan and with what constraints, terms, and conditions?
• Once the project is completed will you finance the term loan for the building?
• How long will the term of the take out loan be if you decide to make the loan. How often with the loan be repriced within that term?
• Your banks funding sources are core deposits with maturities under 18 months and callable advances from the Federal Home Loan Bank with a five-year maturity at a rate of 2.35%. Your Bank is paying 0.60% on average for core deposits.
• What collateral or assignments will you want from the borrower? And what other information from the borrower and or the tenant might you want before you make the loan decision?
• How will you price the loan? (what rate will you charge and fees if any)

Please explain how you would structure this loan facility(s) and if you would make the loan or not and why or why not? Write is up as a loan proposal for the bank's credit committee.

Also utilize NPV skills to demonstrate borrower's ability to service debt and to validate appraised values.