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Commercial Mortgage loan

N

Nimisha

Member
Hi
Not very clear with the understanding of Commercial Mortgage Loan concept -Sept 2019 Paper 2 Ques 2.
The SPV borrows money from LifeCo and the special purpose company owns the property.For example in case A,does it mean that the property that the special purpose company owns is leased to Company R ,the income from which will be used to pay the loan interest to LifeCo?

Also,please explain the concept of re financing.
Please guide on how shall one approach such questions in the exam considering that a person is not familiar with the concept of this product and no where in the course notes could I find any mention of this product.

Thanks.
 
Hi Nimisha,
The S19P2Q2 is an example of securitisation. Under this, LifeCo will make an upfront payment to the SPV, and in return will receive coupon payments and a final repayment. You are right in the sense that the SPV owns offices and rents an office to R such that rental income collected from R will be use to pay the coupon payments to LifeCo.

Commercial mortgage in nature operates in such a way that the income derived from a property is used to pay interest and/or capital payments. The final repayment which will be due at the end of the period can be either made on sale of the property or via refinancing a further loan. Hope this makes sense now?

What i would do for such question is to consider which chapters are linked and try see from the core reading what is useful. For example, securitisation, property (SYSTEMT/CALL ST), investment strategy and direct/indirect investment.
 
Okay,Thanks for giving more clarity.
Please explain the concept of refinancing.
 
Hi Nimisha,
By definition, this means the replacement of an existing debt obligation with another debt obligation under different terms. So, if you are not able to settle your final repayment, you would arrange for an another debt. Hope this sheds some light now.
 
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