Real Estate Division

Real Estate Finance in a Canadian Context

BUSI 221 Review Lecture

Sharon Gulbranson

TopicsREAL ESTATE DIVISION

Topics

• Comments on Project 2• Format of exam• General exam tips• Key topics and multiple choice questions

M t Fi R i Q ti• Mortgage Finance Review Questions• Questions?

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Project 2 CommentsREAL ESTATE DIVISION

Project 2 Comments

P t 1 l l ti ti h k BEGIN• Part 1: calculation questions: show your work, BEGIN key, rounding of payment

• Part 2: most did Case Study—well donePart 2: most did Case Study well done

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221 Final ExaminationREAL ESTATE DIVISION

221 Final Examination

• 3 hours, 100 marks• 2 sections: multiple choice and

itt / l l tiwritten/calculation• Multiple choice: 25 marks• Essay/written: 75 marks• Essay/written: 75 marks• Essay/written portion: calculation and written

answers• Mtg finance calculations: appx 50% of exam• Law: 5%-10% of exam

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General Exam TipsREAL ESTATE DIVISION

General Exam Tips

W t h ti i ll lti l h i• Watch your time, especially multiple choice questions

• Do questions in any orderDo questions in any order• Show your work for calculation questions• Point form is ok for written answers• Try every question, especially multiple choice

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Ch. 1: Intro to Mtg FinanceREAL ESTATE DIVISION

Ch. 1: Intro to Mtg Finance

T i fi i l l fi i l k t• Terms: i.e., financial leverage, financial market, wheel of economy, money market, capital market

• Why use debt?• History of Cdn mortgages• Sub-prime market• Bank of Canada

Interest rates• Interest rates• Mtg market and characteristics of mtg loans as

investments

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Multiple choice question 1REAL ESTATE DIVISION

p q

As a result of the economic collapse during the 1930s Great Depression, lenders switched from:from:

(1) Fully amortized loans to partially amortized loans

(2) Interest only loans to partially amortized loans

(3) I t t l l t f ll ti d l(3) Interest only loans to fully amortized loans(4) Fully amortized loans to interest only loans

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Ch. 2: Mtg Finance and Market Participants

REAL ESTATE DIVISION

Market Participants

Id tif d d ib k l h t d• Identify and describe key players: chartered banks, credit unions, trusts and insurance companies

• Mtg brokers and mtg fraud

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Multiple choice question 2REAL ESTATE DIVISION

p q

Whi h fi i l i tit ti d i tWhich financial institution was a dominant participant (in terms of mtg loan approvals) in the mtg market during the 1980s?

(1) chartered banks(2) credit unions(3) trust companies(4) lif i i(4) life insurance companies

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Multiple choice question 3REAL ESTATE DIVISION

p q

Th t i t f t f dThe two main types of mortgage fraud are:

(1) value fraud and brokerage fraud(1) value fraud and brokerage fraud(2) counterfeit fraud and brokerage fraud(3) identity fraud and value fraud( ) y(4) none of the above

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Ch. 3: RE Finance and Gov’t Policy

REAL ESTATE DIVISION

Gov t Policy

Hi t f H i P li i C dHistory of Housing Policy in Canada• Dominion Housing Act• National Housing Act• National Housing Act• CMHC

• Mortgage Loan Insuranceg g• Mortgage Rate Insurance

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Ch. 4 and 5: Law ReviewREAL ESTATE DIVISION

• Real property law• Contract law• Mortgage law• Mortgage law• Mortgage fraud• Implementation and enforcement of mtgsImplementation and enforcement of mtgs

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Ch. 6: Mtg Math ReviewREAL ESTATE DIVISION

Ch. 6: Mtg Math Review

• Interest rates payment OSB• Interest rates, payment, OSB• Accrued interest• Annuities: definitions and calculationsAnnuities: definitions and calculations• Mortgage constant• P/I split: one payment and over time• Final Payments• NPV, IRR, Profitability Index (PI)

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Multiple choice question 4REAL ESTATE DIVISION

p q

Calculate the annual mortgage constant for a loan with monthly payments over a 25-year amortization period at an interest rate of 5% peramortization period at an interest rate of 5% per annum, compounded monthly.

(1) 0.0585(2) 0.0702(3) 0 0933(3) 0.0933(4) impossible to determine with information

providedprovided

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Calculator StepsREAL ESTATE DIVISION

Calculator Steps

5 I/YR12 shift P/YR1 PV1 PV300 N0 FV0 FVPMT -5.84590042E-3X 12 = -7.0150805E-2

0.070150805, rounded to 0.0702

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Ch. 7: Residential Borrower Qualification

REAL ESTATE DIVISION

Qualification

I f ti C ll ti li ti dit• Information Collection: application, credit analysis, appraisal

• Lending Policy• Income: GDS and TDS Ratios• Security: LTV

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Multiple choice question 5REAL ESTATE DIVISION

p q

The loan amount a borrower qualifies for can beThe loan amount a borrower qualifies for can be increased by:

(1) decreasing the amortization period. (2) decreasing the loan-to-value ratio. (3) decreasing the total debt service ratio.(4) increasing the gross debt service ratio.

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Ch. 8: Commercial Mtg Underwriting

REAL ESTATE DIVISION

Underwriting

C i l id ti l• Compare commercial vs residential underwriting

• Cash flow analysis (find NOI)

• Lending constraints• Income: safety margin, DCR• Security: LTV

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Multiple choice question 6 REAL ESTATE DIVISION

p q

A lease where the tenant is required to pay a specified percentage of gross or net sales made upon the premises is known as a:upon the premises is known as a:

(1) net lease( )(2) gross lease(3) percentage lease(4) triple net lease

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Multiple choice question 7REAL ESTATE DIVISION

p q

Which of the following mortgages best protectsWhich of the following mortgages best protects lenders from a loss in purchasing power? (1) price level adjusted mortgage( ) p j g g(2) straight line principal reduction(3) shared appreciation mortgage(4) interest only mortgage

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Ch. 9: Mtg Loan Repayment Plans

REAL ESTATE DIVISION

Repayment Plans

St i ht li i i l d ti• Straight line principal reduction• Variable rate mortgage• Graduated payment mortgage• Graduated payment mortgage• Sinking fund assisted mortgage• Reverse mortgageg g• Participation mortgage (SAM and income)• Price level adjusted mortgage

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Multiple choice question 8REAL ESTATE DIVISION

p q

The book value of a mortgage represents: (1) an estimate of the amount that might be received if an existing mortgage is sold in anreceived if an existing mortgage is sold in an arm’s-length transaction under current conditions (2) the amount of principal outstanding at a particular point in time (3) the price an investor will pay for an(3) the price an investor will pay for an existing mortgage (4) the cost of funds advanced ( )

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Ch. 10: Loan Mgmt and Refinancing Options

REAL ESTATE DIVISION

Refinancing Options

• Partial and full prepayment• Arrears and default• Refinancing:• Refinancing:

• Why refinance?• Options: new 1st, 2nd mtg and blended rateOptions: new 1 , 2 mtg and blended rate

• Loan pricing: • book value, market value, investment value,

cost of funds advanced, yield to lender

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Multiple choice question 9REAL ESTATE DIVISION

p q

The four major categories which track the stages ofThe four major categories which track the stages of activity in the land development process are: (1) business costs, project initiation, development management, and final marketing(2) market monitoring, land acquisition, construction financing and salesconstruction financing, and sales(3) exploratory costs, planning costs, development management, and property management(4) fixed overhead costs, feasibility studies, management decision and leasingmanagement decision, and leasing

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Ch. 11: Development Financing

REAL ESTATE DIVISION

Financing

• Overview of land development: costs/process• Development financing options:

• reserves line of credit construction financing• reserves, line of credit, construction financing• Construction financing:

• Underwriting and qualification structuring andUnderwriting and qualification, structuring and funding the loan

• Alternatives to construction financing: • joint ventures, participation loans, long-term

loan with progress advances

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Ch. 12: Leasehold FinanceREAL ESTATE DIVISION

Ch. 12: Leasehold Finance

T f l• Types of leases• Occupation leases• Ground leasesGround leases• Sale-leaseback• Appraisal of leasehold interestpp• Valuation methods

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Multiple choice question 10REAL ESTATE DIVISION

p q

A parcel of land currently valued at $2 500 000 can beA parcel of land currently valued at $2,500,000 can be obtained on a 80 year ground lease at an annual rent of $200,000. The land is currently vacant and a d l l t t t b ildi th itdeveloper plans to construct a building on the site. Upon completion, the property will rent for $450,000 per annum (net). A market discount rate of j1=6% is p ( ) j1used to value the profit rent. What is the appraised market value of the leasehold estate? (1) $3 301 800(1) $3,301,800(2) $4,992,900(3) $ 3,765,500 (4) $4,127,300

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Calculator StepsREAL ESTATE DIVISION

Calculator Steps

Profit Rent = $450,000 - $200,000Profit Rent = $250,000

6 I/YR1 shift P/YR1 shift P/YR250000 PMT80 N80 N0 FVPV -4,127,282.69257

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Mtg Finance Review Questions

REAL ESTATE DIVISION

Questions

• 12 mortgage finance review questions on website• Covers concepts in chapters 6-10• Detailed solutions provided with calculator steps• Detailed solutions provided with calculator steps

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Questions?REAL ESTATE DIVISION

G d l k th fi l i ti !Good luck on the final examination!

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