Disregard: Debt and Shareholder Value Considerations Essay

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Class 6 - Debt & Shareholder Value Considerations
Debt Considerations
Loan size
Secured vs. Unsecured:
Secured loans are protected by an asset or collateral. Unsecured loans are credit cards, student loans, etc.
Loan to value
Guarantees and carve outs:
A company taking a carve out is not selling a business unit outright, and may instead sell an equity stake
Amortization period
Sweep:
Certain covenants to pay down any outstanding debt with free cash flow.
Balloon payment
Prepayment penalty
Fixed vs. variable rate
Defeasance
Interest only (I/O) period
Interest for 360 vs. 365 days
Points:
Each point is equal to 1% of the total amount mortgaged. Origination points are used to compensate loan officers. Discount points are prepaid interest. The purchase of each poin generally lowers the interest rate on you mortgage by .25% . There are 2 primary factors to weigh when considering discount points. First, the legnth of time you expect to live in the house. Second, whether or not you have enough money to pay for them.
Syndicated vs. Owned:
A loan offered by a group of lenders (called a syndicate) who work together to provide funds to a single borrower. The main goal is to spread the risk of a borrower default acroos multiple lenders. Because syndicated loans tend to be much larger than standard bank loans, the risk of even one defaulting couple cripple a single lender.
Assumability:
A mortgage that the borrower may transfer to another party. That is, upon the sale of RE with an assumable loan, the seller lets the buyer take over the mortgage, which allows him/her to buy the RE with the same terms as the original loan. Most VA and FHA loans are assumable.
Certainty to close

Class 6 - Debt & Shareholder Value Considerations
Debt Considerations

Debt financing may:
Increase equity yields
Optimize purchasing power
Lower average cost of capital

The amount of debt on an asset may increase when:
Cash flows are predictable
Rates are perceived to be low
Cost of bankruptcy is low (e.g. unsecured loan)
Tax laws are favorable
Depreciation component is low

Riskier property requires more equity

Class 6 - Debt & Shareholder Value Considerations
Types of Debt

Amortizing Loans:
A loan with scheduled periodic payments of both principle and interest
Loans with drawdowns:
When a mortgage is confirmed, the lender may agree to lend you a pre-agreed amount of extra money without having to go through a formal application process.
Interest only / amortizing loans
Mezzanine loan
Balloon loans
Takeout commitment:
A specific type of of mortgage agreement. Under a take-out commitment, a long term investor agrees to buy a mortgage from a mortgage banker at a specific date in the future. Take-out commitments are enforced once a project reaches a particular stage where long-term, rather than short
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