Real Estate Finance: LRT Investment Decision Case Study Analysis

This assignment presents an analysis of the LRT Investment Decision case study, focusing on real estate finance. The analysis evaluates three investment opportunities: direct mortgage lending, a Collateralized Mortgage Obligation (CMO), and a Commercial Mortgage-Backed Security (CMBS). The case study examines the benefits and drawbacks of each option, considering factors such as risk, cost, loan maturity, and amortization periods. The solution also analyzes three specific CMBS deals, North Mall, FDR portfolio, and Camel I portfolio, assessing their potential for future losses based on property depreciation and lease expiration dates. The analysis includes references to relevant financial literature, providing a comprehensive overview of the investment decision-making process within the context of commercial real estate finance. The assignment aims to provide insights into making informed real estate investment recommendations.

REAL ESTATE FINANCE.
Student Name

Question 4.
Mortgage Lending refers to the lending of money to someone who intends to buy a house or any
other real estate property and use that property as a collateral for the loan.
The benefit associated with the direct lending option in this regard is that the mortgage has been
spilt into two. This lowers the general risk of investing in this mortgage. Additionally, it is
advantageous because it has been likened with fixed income securities. On the other hand,
however, this option may be costly. This is because its high returns simply imply high risk. Any
investment that has potential of high returns obviously involves high levels of risk (Lin and
Zhang, 2013). This makes investment returns for this option uncertain.
Investing in one of the CMBS security class may be costly. This is because the loan maturity
period is low and the mortgage rate is high. When these two factors are compared, the returns
that the company might derive from the deal will be low. The benefit that these options have is
the long loan amortization period that would give the company enough time to clear off the loan.
Investing in one of the CMO tranches proves to be costly. This is because the company may have
to incur high interests for other trenches while servicing the principal amount of the first trench.
This will highly affect the total returns that the company would make from this investment. The
only benefit related to the CMO trenches is the long loan maturity period. This would give the
company enough time to pay off the loan.
Question 5.
i) North Mall.
 The property is located in a rural area and was built in 1982.

 The company can get a loan of up to $40 million with a mortgage rate of 5.5%.
 Loan maturity is 5years and loan amortization is 25 years.
 The current lease for the occupants will expire between 2021 and 226.
ii) FDR portfolio.
 The properties were built not earlier than 2014 in different parts of the country.
 Total loan amount is $30 million with a mortgage rate of 4.75%.
 Loan maturity is 5 years and loan amortization is 25 years.
 The current lease for the occupants will expire between 2025 and 2029.
iii) Camel I portfolio.
 Properties are spread across the country.
 Loan amount is $30 million with a mortgage rate of 5.25%.
 Loan maturity is 5 years and loan amortization is 20 years.
 The current lease for the occupants will expire between 2023 and 2030.
Considering the three options offered in the CMBS deal, there seem to be future potential losses
for North Mall. This is because of the accumulated depreciation factor. Considering the time that
the property was built, its accumulated depreciation by now could be high. This will directly
affect the value of the property (Giudice, Manganelli, and Paola, 2016). This means that in
future, the value of the property will be very low, resulting in losses.
References

Lin, X. and Zhang, L., 2013. The investment manifesto. Journal of Monetary Economics, 60(3),
pp.351-366.
Del Giudice, V., Manganelli, B. and De Paola, P., 2016, July. Depreciation methods for firm’s
assets. In International Conference on Computational Science and Its Applications (pp. 214-
227). Springer, Cham.