Cherry Towers is a well-leased CBD office building in a major East Coast city. It has never had occupancy below 90 percent; however, leases representing 40 percent of the rentable space are expiring in five years. Oxy Capital Corp, a private lender, is offering a choice of two loans: a threeyear, 70 percent LTV loan at 4 percent, and a seven-year 50 percent LTV with financing at 7 percent. Both loans are sufficient to pay off your existing financing and feature a 20-year amortization schedule. Which loan do you recommend?

1) Place these claims in order of seniority:
I. First mortgage II. Common equity III. Mezz debt IV. Preferred equity

a) I, II, III, IV

b) IV, II, III, I

c) I, III, IV, II

d) III, I, IV, II 2) Which of the following is not typically used as a mortgage covenant?

a) DSCR

b) Quick ratio

c) LTV ratio

d) Interest coverage 3) Which of the following statements about the impact of adding additional debt are incorrect?
I. More tax benefit II. While I < ROA, ROE increases III. While I > ROA, ROE increases IV. Distress can result V. Credit spread decreases

a) I, II, V

b) II, IV

c) III, IV

d) I, II, IV 4) One of the following was not a result of the financial crisis:

a) Interest-only loans

b) Increased amortization

c) Higher credit spreads

d) Lower LTV limits 5) Negative leverage exists when:

a) ROA > Cap rate

b) ROA > Cost of debt

c) ROA > Cost of equity

d) ROA < Cost of debt 6) If LTV increases and DSCR decreases, what is the impact on the cost of debt?

a) Decreases

b) Remains the same

c) Increases

d) No impact 7) Increasing the amount of leverage applied has what impact on the risk associated with a property investment?

a) Decreases

b) Remains the same

c) Increases

d) No impact 8) The purpose of a yield maintenance fee is to:

a) Protect the lender against prepayment risk

b) Protect the lender against rising interest rates

c) Maintain the lender’s yield on a loan if issuer credit changes

d) All of the above 9) Which of the following is not a reason to sell an asset in a sale-leaseback transaction?

a) Because the property owner does not want to use the space

b) To transfer depreciation expense to an investor

c) As an alternative to refinancing the property

d) To provide financing for a new acquisition 10) If the property ROA is 10 percent, for which Kd is the leverage positive?

a) 10 percent

b) 8 percent

c) 12 percent

d) 14 percent 11) Common mortgage types include all of the following except:

a) Interest-only

b) Fully amortizing

c) Preferred

d) Convertible 12) The pay rate ________ exceeds the interest rate in a negative amortization loan.

a) Never

b) Always

c) Sometimes

d) Not relevant