Question

15) A banker has an office mortgage proposal that she wants to sell in a CMBS and wants it all to be shadow rated as an investment grade loan. The max investment grade proceeds cut-off is BBB-. If the banker’s underwritten net cash flow from the office building is $10,000,000, and the rating agency underwrites an 11% haircut to net cash flow, what is the maximum loan size that will qualify as investment grade at BBB- using the DSCR test if: a) the Rating Agency minimum acceptable DSCR for Class A office buildings at BBB- is 1.35x and b) the Rating Agency determines the stressed loan constant for sizing this loan is 9.25%?

a) $80,080,000

b) $71,271,000

c) $96,216,000

d) The DSCR test is irrelevant because the Rating Agencies use the LTV test

Answer 1

The net operating cash flow is mentioned as $10000000.
However, rating agencies are expecting an 11% haircut on this cash flow.

10000000 * (1 - 0.11) = 8900000

The DSCR is required to be a minimum of 1.35x for BBB- rating

DSCR = Net Operating Income / Debt Service

Total Debt Service = 8900000 / 1.35
= 6592592.59

Now the loan constant is given as 9.25%

Loan Constant = Debt Service / Loan Amount

Loan Amount = 6592592.59 / 0.0925

Loan Amount = 71271271

Option B is correct

The difference in the values is due to rounding off.