Loan advice

Most commercial real estate loans are essentially collateral-based lending, despite protestations by bankers to the contrary. Cashflow analyses are usually based on sales (for developers) and rental yields (for investors). Both depend on the level of real estate prices. If prices drop developers will have to cut their expected asking prices and higher rental yields from lower prices are unlikely to be sustainable. Tenants will demand that their rental payments are cut.
Loans to developers of large prestige projects are generally higher risk than are those to developers specializing in small-scale landed residential developments. Many loans to real estate investment companies have bullet structures whereby there are no principal repayments until “term”. In many instances there is a real difference between “economic” term and legal term as defined in a loan agreement. Many loans to companies holding real estate for investment purposes are simply rolled over at term and in practice have more in common with perpetuities than term loans.