RE Cap Mkts Notes
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BMC Course
o 8-12 hours
Sign up for TREPP
o $50/semester
o Will be used for CMBS Presentation and CLO Presentation
o Need to be familiar within next 6 weeks or so
Deliverables
o CMBS
o CLO
o Midterm
o Final
o Class participation
Private RE Debt Markets
o Private debt
 Loans held on balance sheet
o Public debt
 Securitized and owned by the public through mkts
Insurance companies
o Balance sheet
 Assets
 Liabilities
o Good place to go for LT debt like ground leases
 Because life insurance policies have long time before death benefit usually
Pension funds
o Get $ in every month
o Liabilities are when people retire
 30+ years
o Like large long term debt
Private equity
o Hot money
o Shorter term
o 2 n 20
o Will realize investments 1-3 years out
o Will look to get levered returns
 Loan on a loan
Government debt
Crowd funding
Basic commercial mortgage terms
o Deed of trust – power of sale
 Power of sale state
 Put deed with trustee as collateral
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If pay timely interest or principal get deed back if not deed goes to
lender
o Mortgage – lien on a property
 Lowest interest
 Judicial foreclosure states
 Process can take a while to clear
o Lien property
o Loan constant
 I = 6%
 Amortization is 25 years
 Loan amount PV 100
 DS pmt as a % of loan balance (p+i)? Aka K aka loan constant
 Divide I/12 = .005
 Loan constant is like a cap rate for debt
o Lender will only lend to a certain DSCR
o NCF/DSCR/K =
Debt Yield
o NOI / loan balance or NCF / loan balance
 NCF is more conservative because its lower
 Something rating agencies would use
 NOI would be used by janky regional banks
o Is like a way for a lender to see if they can get out of the property without a loss if they
foreclose comparing it to the mkt cap rate
o Is essentially the bottom line
Private Debt Mkts
o Interest only loans
 Would want it if you aren’t receiving income or property is not stabilized
 Bridge loan or construction loan
 5 year io loan that converts to 25 year am or 10 yr 25 am
 As borrower woud like 5 year that converts
o Can get better returns in 1st 5 years after DS to give to investors
 As lender
o Like 10 year amortized because pay principal and interest
reducing risk
Yield curves
o Shows interest rate on bonds
 Upwardly sloping yield curve
 Sign of growing mkt
 Inverted yield curve
 Sign of a recession
o Interest rates in short run are more uncertain
Pricing mtgs
o Benchmarks
 LIBOR, SOFR, FHLB
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Used to be LIBOR and now is usually off SOFR
o Current SOFR 8.25%
Spread
 Prime – 50 bps
 Could be 100 – 300 bps or 400-600 over SOFR
Class 2 6/7/2023
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RMBS
CDO
o Collateralized Debt Obligations
CLO
o Collateralized loan obligations
Class 4
6/14/2023
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Needs us to break out in teams for CMBS deal
Class 5
Large loan problem set
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Subordination level
o The loss cushion on AAA Debt
Break even spread
o Treasure + bps
Attachment poit 0% LTV
Detachment point
o The end of the tranche at a certain LTV
DSCR test
o NCF / DSCR / Stressed LC = Total Loan BBB Max proceeds?
B – Piece notes
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Probability of default
o Based on DSCR
LGD loss given default
o Function of LTV
Expected loss
o = POD x LGD
 Multiply by $ amount to come up with $EL
Interest would be coupon x par value or tranche
If loans default interest cf and principal cf go down over time
CMBS on the brink 2007
CLO
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OC Test – over collateralization
o BBB- and above $60
o Rest $40
o OC test will see how much
IC tests
Most clo loans are non-recourse
Class 7/26/23
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UPREITS
o Arbitrage
 Public capital market value of CRE > Private mkte value
REIT Requirements
o 90% taxable income to sharegholders
 GAAP income
o 75% earnings test
 Must come from RE properties or Mortgages
o 75% asset t
81 tax act
o Rapid depreciation of cost basis