hard · Asset-Backed Securities collateral
A commercial property generating $5,000,000 in Net Operating Income (NOI) is financed with a $55,000,000 loan.
If the prevailing market Cap Rate widens from 6% to 8%, what is the new Loan-to-Value (LTV) ratio and what is its primary implication for a CMBS lender at maturity?
- The new LTV is 75%. The lender can trigger the Cash Management account to trap all rental income, applying it toward principal until the LTV returns to a target of 65%.
- The new LTV is 110%. The lender is considered underwater and must foreclose immediately, since the Debt Service Coverage Ratio will fall well below the critical 1.0x threshold at this cap rate.
- The new LTV is 69%. The implication is that the Debt Yield remains essentially stable at roughly 9.1% given unchanged NOI, giving the lender enough cushion to comfortably extend the loan at maturity.
- The new LTV is 88%. The implication is high refinancing risk, as the borrower has significantly less equity and may struggle to find a new lender to cover the full $55M balance.
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