Wall Street Money

Wall Street

Presented by

Shawn Rabban

(310) 714 5616

DRE. 00667328
NMLS. 298861 / 729817

Conduit Loan Program

This outline contains the current general parameters of the lending program.
The program contains additional details and requirements that are not included
in this summary. All program requirements and underwriting criteria are subject

to change by lender without further notice. Nothing contained herein is Intended
to be nor should it be construed as, a commitment to lend on these or any other

terms.

Property Type Retail, Industrial, Office, Medical, Warehouse, Self-
Storage
Loan Amount $5,000,000 to $300,000,000

Loan to Value Up to 70%

Amortization Up to 30 years

Term 10 years

Debt Coverage Ratio 1.20

Interest Rate Fixed for 10 years

Index 10 years treasury bill

Spread 2.00

Origination Fee 1%

Security First Mortgage

Recourse Non-recourse subject to standard carve out
Assumption Yes, three times

Subordinate Financing Generally not allowed

Lock-out Period First three years

Pre-payment Penalty Defeasance
Escrows Required for property tax and insurance
Final three months There is no pre-payment penalty
Closing Cost Borrower to pay normal and customary closing costs

that include: third party reports, title insurance,
escrow, recording fees, and lender’s legal counsel.



A Commercial Real Estate Conduit Loan Program is a permanent

fixed-rate mortgage that is designed as a non-recourse loan according to specific
underwriting guidelines.
Conduit Loan programs are available for many income producing property
including:

• Retail
• Apartment
• Office
• Industrial
• Medical
• Hotel
• Self-Storage
• Warehouse
• Mixed-Use

When working with City Capital Realty.
You can feel confident that our professional mortgage staff will fulfill your
needs and exceed your expectations.
We are available to answer all your questions and concerns.
Part of our continuing goal is to provide our clients with excellent service.

Our focus and passion throughout the loan process is you, our clients.
With you in mind, we take each of our loans personally, working through
problems and providing solutions, becoming as concerned over the loan as the
person we are working for.
Once you have discovered your mortgage needs, allow us to take away your
worries and make them ours.

Conduit Loans are relatively new in the market.
Conduit Loans are designed to pool your loans with other similar assets to sell in
secondary market.

Most securitized loans will have balloon payment provisions at the end of the
fixed rate term that you will need to refinance.
However, because the underwriting criteria and due diligence are fairly stringent
for non-recourse loans, the interest rates tend to be more attractive compared to
convention loan programs.



Conduit Loans are designed to remain in place for the life of the note
to ensure the marketability of the securities created when they are
pooled together and sold.

A few things to keep in mind before you obtain a conduit loan.
Usually, Conduit Loans change hand a few times during the term of
loan that is normally 10-year period. It
will be a good idea to negotiate the loan documents’ contents in
advance because it will be beneficial to future buyers if you decide to
sell your property in the near future.

City Capital Realty can arrange special provisions on loan
documents regarding assumption clause:

1. 0.50% assumption fee for first time
2. 0.75% assumption fee for second time
3. 1.00% assumption fee for third time.

With City Capital Realty Conduit Loan Program, you can have
multiple entities to be recorded on the title.

Sometimes it is necessary to have different entities on the title,
because investors come from different exchanges or they might want
to do future exchange on their own.



LEASE ASSUMPTION
In a third-party lease assumption or “transfer” or “assignment” or

Exhibit A $100,000
< 5,000>
Example of Income Producing Property 95,000
Gross Scheduled Rents <30,000>
Less 5% Vacancy Amount 65,000
Effective Gross Income
Less Operating Expenses 7.6%
Net Operating Income 850,000
Cap Rate 255,000
Property Value 595,000
Down Payment: 30% 51,122
Loan Amount: 70% 13,878
Rate 6% x 25 yr. (yearly payment) 1.27
Cash Flow 70%
Debt Coverage Ratio 5.4%
Loan to Value
Return-on-Investment



Please note that lenders always insist on some sort of vacancy factor regardless
of the actual vacancy rate in an area to cover collection loss. In addition,
lenders always insist on using a management factor of 3-5% of effective gross
income even if the owner is managing the property.

Operating Expenses include the following items:

• Property tax
• Insurance
• Management
• Maintenance
• Repairs
• Supplies
• Reserve
• Miscellaneous

NET OPERATING INCOME (NOI)
Net Operating Income is the property’s gross income plus any other

income, such as parking income less vacancies. Essentially, NOI is the net cash
generated before mortgage payments.

Net Operating Income is calculated like this:

Gross Scheduled Income $100,000
Less: Vacancy Amount 5,000
Effective Gross Income 95,000
Less: Operating Expense 30,000
Net Operating Income
65,000

Net Operating Income is one of the most important factors.
Capitalization rate is used to estimate the value of income producing

property.

Let’s assume7.6% is capitalization rate for this type of property that you are
considering to buy.

A market cap rate is calculated by evaluating the financial information from
comparable sales data of similar income producing properties in the same
market area.



We would estimate value of this property like this: (See Exhibit A)
Example 1: A property has NOI of $65,000 and cap rate of 7.6%

Estimated Value = Net Operating Income = $65,000 = $850,000

Cap Rate 7.6

Example 2: A property has a NOI of $65,000 and asking price is $850,000

Cap Rate = Net Operating Income = $65,000 x 100 = 7.6 %

Market Value 850,000

The cap rate may vary in different areas of city for many reasons such as
desirability of location. You should expect lower capitalization rates in newer or
more desirable areas of city and higher cap rates in less desirable areas.

The most important ratio to understand when making income property loans is

the debt service coverage ratio.

It is defined as:

DSCR = Net Operating Income = $65,000 = 1.27

Total Debt Service 51,122

DSCR of 1.27 times as much annual income as the annual debt service on the
property in this example, the property creates 27% more income than is
required to cover the annual debt service.

DSCR of 1.0 is called a break-even cash flow. That is because the net operating
income is just enough to cover the mortgage payment (debt service).
DSCR of less than 1.0 would mean that there is only enough net operating
income to cover 90% of the mortgage payment. This would mean that borrower
would have to come up with cash out of his personal budget every month to
keep the project going.
Lenders use debt coverage ratio (DCR) to determine if income-producing
property has sufficient income to cover the operating expenses and debt
services.

Cash on Cash Return is probably the most important ratio you need to focus

on when evaluating the long-term performance of a property investment.
Cash on Cash Return is the property’s annual net cash flow divided by net

investment, expressed as a percentage.

First Year Cash Flow = $13,878 = 5.4%

Down Payment 255,000



Loan-to-Value Ratio

The loan-to-value ratio is calculated by dividing the loan balance of a property
by the market price. For example, a property with a loan balance of $595,000
and market price of $850,000 has a loan-to-value ratio of 70%.

Loan-to-Value Ratio = Loan Amount = $595,000 = 70%
Market Price $850,000

The loan-to-value ratio formula can be used to estimate the amount of equity
you have in a property.
The Loan-to-Value (Ltv) ratio is probably the most important of the three
underwriting ratios.

Commercial Real Estate Financing is underwritten on a case-by-case

basis.
Every loan application is unique and evaluated on it’s own merits.
But there are few common criteria lenders look for in commercial loan
packages.

1. 1. Credit Worthiness

Lender will examine your credit history to help determine your
willingness to repay a loan. They consider your past repayment
performance to be the best indication of willingness to pay on time in the
future.

2. Property

Property analysis (age, location, condition, type of property) will affect
the risk.

3. Loan-to-Value

The loan-to-value ratio is probably the most important of the three
underwriting ratios.

4. Debt Coverage Ratio

A key component in making an underwriting evaluation.

5. Net Operating Income

Net Operating Income is the income from a rental property after
deducting from real estate taxes, fire insurance, repairs and other
operating expenses.



How your Loan Request will be reviewed:
When reviewing loan request, lender is primarily concerned with repayment.
Mortgage consultant judge loan applications based on what is commonly
referred to as the five C’s of credit.

1. Character
Lenders will order a copy of your credit report and look at debt repayment
trends. They want to know simply if you pay your bills on time.

2. Cash Flow
Lenders will look at historical and projected cash flow statements to
determine whether you will be able to repay the loan.

3. Collateral
Collateral is an asset which a lender my claim to satisfy a loan in the
event the loan isn’t repaid.

4. Capitalization
Capitalization refers to the basic resources of the company including
owner’s equity.

5. Conditions
Factors that affect the success of investments.

Yield Maintenance vs. Defeasance

Yield Maintenance
Yield Maintenance is an actual “pay off” of the existing loan. There has been
no standardization of yield maintenance language. There is always a minimum
prepayment penalty of at least 1% of the loan balance.
Yield maintenance is a prepayment of the loan with cash.

Defeasance
Defeasance is a substitution of collateral. A portfolio of qualified U.S.
Government obligations is structured such that it will produce sufficient cash
flow to make all remaining payments due under the note as and when the same
come due. The securities are pledged to the lender in exchange for the lender’s
release of the real estate from the lien of the mortgage. Conduit loan
defeasances involve a number of parties, require a number of deliverables, and
generally take about thirty days to complete.

Defeasance is a 30-day process involving a substitution of collateral.

There has been a high level of standardization of defeasance provisions.



-Loan Glossary-
Capitalization Rate
A method used to estimate the value of a property based on the rate of return on
investment. In real estate appraisal, capitalization is the process of converting
income. In the case of real estate, we divide net operating income by a property
value. In general, the lower the cap rate the better if you are selling and the
higher the cap rate the better if you are buying.

CMBS
Is an abbreviation for “Commercial Mortgage-Backed Securities”

Common Area Maintenance (CAM)
Tenant is responsible for payment or reimbursement of common area
maintenance (CAM).

Dark Space
Vacated retail space. Tenant may still be paying rent but “induced” smaller
tenants may exercise right to cancel leases with the major tenant goes “dark”.

Grocery Anchor Retail
A retail property in which one or more tenants including a grocery anchor tenant
occupy the property.

Gross Income
Total income, before deducting taxes and expenses.

Index
An economic indicator, usually a published interest rate, e.g. prime rate,
treasury bill, libor, MTA.

Prepayment Penalty
A fee charged by the lender to allow the borrower to retire the loan earlier than
its stated maturity.

Rating Agency
Rating agencies are private companies that rate the credit worthiness of bond.

Real Estate Investment Trust
A business entity formed to invest in real estate mortgages or securities backed
by real estate. REIT is required to pass through 95% of taxable income on their
investors and is not taxed at the corporate level.



REMIC Trust

Remic is and abbreviation for “Real Estate Mortgage Investment Conduit”.
A REMIC Trust is the entity to which a lender transfers its loan when they
securitized them.

Replacement Reserves

Monthly deposits that a lender may require a borrower to a reserve in an
account.

Securitization

Refers to the process by which a lender transfers loans to REMIC Trust.

Tax & Insurance Impound

Monthly deposits that a lender may require a borrower to a reserve in an
account.

Tenant Improvement

The expense to improve the property to attract new tenants for a new space that
may include new improvement.

Unanchored Retail

A retail property in which multiple tenants of which none are anchor tenants
occupy the property.

Yield Maintenance

A prepayment premiums that allow investors to attain the same yield as if the
borrower made all scheduled mortgage payment until maturity.



The Defeasance Solution

Rising Property Values
Drive the need to Defease

Defeasance is a Key
to Unlocking Conduit
Loan Prohibitions



An increasing number of property owners want to remove their existing liens
from their properties whose mortgages have been securitized.

“Conduit borrowers buy and sell properties”, so there will always be demand”
for a mechanism that allows for mortgage repayments.

In simple terms, defeasance is the process of retiring a mortgage before its
maturity by replacing its collateral.

With defeasance, a borrower can get out of a CMBS loan, which typically has
strict prepayment penalties, by replacing the collateral with a basket of
treasuries, or other government securities.

The loan is technically still in place but is repaid from securities purchased.
Typically, the borrower pledges U.S. government obligations as substitute
collateral for the loan to the trustee and the transfer of the loan and assigns the
substitute collateral to unaffiliated special purpose entity (SPE) created for the
sole purpose of receiving defeased loan.

A loan is defeased only at the request of the borrower. Generally, the borrower
must provide the lender with at least 30 days written notice of intent to defease a
loan.
The borrower must have a sufficient amount of cash to purchase U.S.
government obligations that will timely pay all scheduled interest and principal.
In addition, the borrower must also pay all related costs and expenses.

Once the collateral is substituted, the borrower is usually replaced. The
borrower has effectively prepaid the loan.
A defeased loan secured by U.S. obligations is less risky collateral loan than a
loan secured by Commercial Real Estate.

The original borrower and the real estate may be fully released from all liability
with respect to the loan.

Although the Internal Revenue Service has not ruled on the tax implications of a
conduit loan defeasance, Revenue Ruling 57-198 allows penalty payments made
by a taxpayer for the privelege of preparing mortgage indebtedness to be
deducted as interest under Internal Revenue Code. Because the defeasance
premium is a necessary cost of the defeasance in excess of the outstanding
balance on the loan, it appears to be in the nature of prepayment penalty that is
deductible from the borrower’s taxable income. Consult with your financial
advisor.



U.S. CMBS: Defeasance Benefits Borrowers and Investors

Cost of Defeasance
The largest component of the cost to defease is the cost of the U.S. Government
Securities that serve as the new collateral for the loan.
Therefore, the cost to defease is dependent on a number of factors including:

Spread between the mortgage rate and treasury rates.
Yield curve at time of defeasance.
Amortization of the loan.
Remaining term on the mortgage.

In general, the cost of the replacement securities referred to as the “defeasance
premium”, REMIC Regulations preclude loans from defeasing until after the
second year of a transaction’s start-up date therefore, there are no defeased loan
until year two.

A prepayment option with no penalty typically permitted for a brief period.
Perhaps three months, prior to loan maturity.
This is an acknowledgment of the difficulty of closing on a new loan or selling a
property exactly on the date the loan matures.

Overview
Many of the structural features in Commercial Mortgage Backed-Securities
(CMBS) transactions were designed so that payment streams in CMBS would
resemble payment streams from corporate bond issuance as much as possible.

This helped the CMBS market top into the large and established corporate bond
investor bare and provided a means for investors to include real estate collateral
in their fixed income portfolios.

One of the key features of corporate bonds is predictability of cash flows.
In general, most issuers of corporate debt are precluded from redeeming bonds
prior to their stated maturity.

Fixed rate loans originated for CMBS also generally limit the borrower’s ability
to prepay before loan maturity.

This ensures CMBS investors a more predictable income stream throughout the
life of their security.



However, borrowers desire flexibility to refinance or sell prior to loan maturity,
resulting in the development of different forms of prepayment mechanisms.

The most typical options include prepayment premiums; yield maintenance and
most recently, defeasance.

Defeasance has emerged as the preferred alternative for handling prepayment in
CMBS.

It has strengthened the predictability of CMBS payment streams for investors
while providing borrowers with flexibility in selling or refinancing their
properties. The largest component of the cost of defeasance is the purchase of
the U.S.

Government Securities that serves as replacement collateral for defeased loan.

Defeasance Defined
Defeasance involves substituting real estate collateral with a portfolio
of U.S. Treasury or agency securities designed to exactly match the
cash flow of scheduled mortgage payments, including the balloon
payment. The mortgage loan remains in the trust but the real estate
originally served as collateral for the loan is released.

Defeasance is a positive feature in CMBS for several reasons:

1. First, loan’s probability of default is significantly reduced
when real estate assets are replaced by US Treasury
Securities, thus improving the credit characteristics of
CMBS transactions that contain defeased loans.

2. Second, defeasance assures that investors receive the
expected income stream until loan maturity. This is
especially important in transactions with interest only (10)
bonds or bonds purchased at premiums where yield can be
significantly affected by early prepayment. Finally,
defeasance provides borrowers with the ability to access
accumulated equity in their real estate prior to loan maturity.

Defeasance is prevailing CMBS prepayment option



Defeasance is prevailing CMBS prepayment option
Yield expectations are generally based on the timely payment of
interest and principal from the underlying loans in a pool with some
allowance for prepayment due to defaults or early pays offs.

The dominant prepayment provision used in both securitized and non
securitized commercial loans were prepayment premiums and yield
maintenance. Both provisions require the borrowers to make a lump
sum payment in addition to the outstanding loan balance to
compensate the lender for potential losses from reinvesting
prepayment proceeds in a lower-yield environment.

Presented by

Shawn Rabban

(310) 714 5616

DRE. 00667328
NMLS. 298861 / 729817