Commercial Real Estate Interview Help
I have been talking to a commercial real estate group in the debt space (mezzanine financing and structured debt) regarding a junior level opening.
My previous conversations with the group have been mostly behavioral, but I assume at some point during my interview process I will face more technical questions.
I've brushed up on my 3 financial statements, how they link, etc., but what else should I prepare for that may be more exclusive to real estate lending/credit?
Also, does anyone have any suggestions for why someone would want to be in real estate on the debt side rather than equity? I have my own thoughts on this, but would like to hear some other ideas.
I look forward to some insight.
Cheers,
ESid23





PM me an email and I'll send
PM me an email and I'll send you a study guide I made which helped me land an offer at one of the top CRE lending groups in the US.
I expect a couple SB's :)
know how to do a DCF and
know how to do a DCF and model returns to the mezzanine / debt layers... also the various ratios (DSCR, ICR, LTV, etc...)
Here's an CMBS Primer from 2005, Morgan Stanley. The rates are outdated and there have been several changes to the industry but it's worth a read if you're looking at commercial real estate finance.
http://www.scribd.com/doc/48925008/CMBS-Primer-5th...
relinquis... Killing the GMAT this December; Over/Under set at: 725 GMATs.
Generally speaking, the three
Generally speaking, the three primary metrics lenders use to size real estate debt are (i) LTV/LTC (loan-to-value or loan-to-cost, the amount of the loan divided by the appraised value, purchase price, or total cost after renovations of a property), (ii) DSCR (debt service coverage ratio, net operating income divided by the debt service), and (iii) debt yield (net operating income divided by the loan balance, essentially represents the cap rate the lender will have acquired the building at if he ends up foreclosing and owning the property).
I would understand each of these concepts, and the benefits and pitfalls of each. For instance, LTV is in theory the most fundamental indication of protection for the debt since it is a gauge of value, and value is the true protection against impairment (even if debt service exceeds income, if there is still excess value in the property, the equity owner has an incentive to ensure the debt is paid).
On the other hand, underwriting on LTV alone is one of the factors that led to the financial crisis. As the market started to heat up, buyers were paying higher and higher prices on properties with no improvement in fundamentals. Lenders kept lending based on LTV, and started to increase LTV thresholds, assuming that as long as there was a little equity behind them, the loan was safe. More generous debt terms led to even greater prices and lower cap rates. Eventually the whole thing fell apart. Greater focus on debt yield (the underlying income securing the debt) might have helped to restrain these practices.