Real Estate Financing: Debt. Banks and other senior lenders will require 100% security in the value of the asset and will often perform their own assessment of the value, which is not always the same as the market value. Market value, of course, can be driven up simply by bidding. The amount of the loan relative to the value of the asset is called the loan-to-value, or LTV. Applying a ratio to determine the amount of the loan is called loan sizing. In situations where the project has development involved and additional capital must be raised and spent to bring the property to where it can begin generating revenue, the ratio that is used is loan-to-cost, or LTC. Other ratios important to the debt lenders are the debt service coverage, or DSCR, which is the unlevered cash flows over the debt service. Debt yield is another important metric, which is the net operating income over the loan amount. And this roughly calculates the time it will take to pay down a loan. With commercial loans, the loan is determined using the LTV percentage acceptable to the lenders. Unlike loans in traditional corporate finance, the term is much longer for these loans. With commercial loans, the loan is determined using the LTV percentage acceptable to the lenders. Unlike loans in traditional corporate finance, the term is much longer. However, there is a mismatch between the term of the amortization of the loan, which is how the loan is repaid each year, and the actual repayment date of the loan in full. This is done to ease the cash flow strain on the asset's owners by calculating the interest and principle as if over a longer period of time, and also allowing the lender to receive its capital back or resize the loan in a shorter period of time. In this example, the loan amortizes over 30 years, so the yearly or monthly, as it usually is, payments are based on that 30-year amortization. However, at the end of year 10, the entire loan is due to be repaid, despite the fact that we've only amortized one-third of it. This is referred to as the balloon repayment. Mezzanine financing in real estate is very similar to leverages finance for traditional corporates. This will comprise 10 to 20% of the asset value and is not secured by the value of the asset, but rather the equity stake in the asset, which puts it between the senior lenders and the equity holders. Interest rates are higher due to the risk assumed, and there's also no amortization on these loans. They're often typically then refinanced using the entire asset value.
