Question

In: Finance

Finance & Real Estate Open Ended Question: Why do lenders approve of a waterfall in which...

Finance & Real Estate Open Ended Question:
Why do lenders approve of a waterfall in which the equity investor receives most of the returns?

Solutions

Expert Solution

Answer-  

The lenders approve of a waterfall in which the equity investor receives most of the returns in real estate sector because the real estate sector is capital intensive.

Most of the real estate sector projects require lot of capital and the source of funding can be raising debt by loans from financial institutions or banks. The raising of capital can be done by issuing equity as well through IPO or secondary offering of shares that are traded on stock exchanges.

The equity investors are entitled to receive most of the returns as the debt raised will increase the leverage and the cost of equity raises due to the risk involved in the investment. The increase of debt will not significantly impact the cost of debt but the debt raised increases the debt/ equity ratio and the company will be leveraged increasing the default risk thus increasing the cost of equity. As the equity holders will require more returns that debt holders due to higher risk and therefore the cost of equity increases to compensate the risk involved in te project.

These reason prompts the lenders to approve the waterfall in which the equity investor to receive most of the returns justifying the increase in risk involved due to leverage involved in real estate projects.


Related Solutions

Finance & Real Estate Open Ended Question: Many zoning laws have a rule that when a...
Finance & Real Estate Open Ended Question: Many zoning laws have a rule that when a developer provides a positive externality for the neighborhood, for example by creating a park, they can build extra floors on their building. Do you think this is fair? Explain.
Finance & Real Estate Open Ended Question: Explain the difference between Asking Rent and Effective Rent.
Finance & Real Estate Open Ended Question: Explain the difference between Asking Rent and Effective Rent.
Real Estate Finance essay question Why did observers at first believe that the damage from the...
Real Estate Finance essay question Why did observers at first believe that the damage from the impending subprime mortgage crisis would be too small to cause a recession?
1.Comparing infrastructure finance with real estate mortgage finance, which of the following statement is not true?...
1.Comparing infrastructure finance with real estate mortgage finance, which of the following statement is not true? a.Value of the underlying asset is the same to the creditor before and after default in real estate mortgage finance. b.Value of the underlying asset is the same to the borrower before and after default in real estate mortgage finance. c.Value of the underlying asset is the same to the creditor before and after default in infrastructure finance. d.Value of the underlying asset is...
why do lenders hire appraisers
why do lenders hire appraisers
Where do producer services tend to locate(i.e finance, insurance, real estate, legal, advertising,engineering)? Why? Provide example...
Where do producer services tend to locate(i.e finance, insurance, real estate, legal, advertising,engineering)? Why? Provide example of the US, Europe, China, and India.
Dr. Godwin decides to open a real estate company which he names, Comfort Realty, Inc. The...
Dr. Godwin decides to open a real estate company which he names, Comfort Realty, Inc. The following transactions were made over the period: On September 1, 2018, Dr. Godwin invested $15,000 cash in the business On September 3, 2018, Comfort Realty purchases computer equipment for $7,000 cash. On September 4, 2018, Comfort realty purchases for $1,600 from ACME supply company computer paper and other supplies exacted to last several months. ACME agrees to allow Comfort Realty to pay this bill...
Dr. Williams decides to open a real estate company which he names, Comfort Realty, Inc. The...
Dr. Williams decides to open a real estate company which he names, Comfort Realty, Inc. The following transactions were made over the period: On September 1, 2018, Dr. Godwin invested $17,000 cash in the business On September 3, 2018, Comfort Realty purchases computer equipment for $8,000 cash. On September 4, 2018, Comfort realty purchases for $1,600 from ACME supply company computer paper and other supplies exacted to last several months. ACME agrees to allow Comfort Realty to pay this bill...
Question 2 Jamie is a real estate agent working for ‘Houses R Us’ real estate. As...
Question 2 Jamie is a real estate agent working for ‘Houses R Us’ real estate. As part of his employment contract, Jamie receives a base salary of $50,000 per annum plus 10% of the agency’s commission on sold properties where he has had a direct connection with the sale. He is also provided with a car, a Toyota Kluger costing $48,000. He is not required to contribute to the running costs of the car which total $13,500 per year and...
Which of the following statement about the real estate development is FALSE ? Real estate development...
Which of the following statement about the real estate development is FALSE ? Real estate development includes five stages: land acquisition, construction, completion and occupancy, management and sales. The real estate development project subjects to the financial risk, scheduling risk and design risk in the construction stage. The most risky stage in the real estate development process is the sales stage. The most risky stage in the real estate development process is the land acquisition stage. Which of the following...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT