hard · Asset-Backed Securities
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 rents to pay down principal until the LTV returns to 65%.
- The new LTV is 110%. The lender is 'underwater' and must immediately foreclose because the Debt Service Coverage Ratio (DSCR) will fall below 1.0x.
- The new LTV is 69%. The implication is that the 'Debt Yield' remains stable at 9.1%, providing sufficient cushion for the lender to extend the loan.
- 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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