Question

Which of the following is NOT true obtaining bank financing for a property?

(A) The interest expense is a tax shield and will lower the taxable income

(B) A higher LTV loan has greater risk and return potential and therefore will have a greater impact on IRR, Equity Multiple and ROE (return on equity) than a lower LTV loan

(C) When underwiring a loan banks, prefer higher, rather than lower, debt service coverage ratios and debt yield ratios

(D) Banks prefer to lend to construction projects (properties under development) since the property is better collateral and less risky than an older (stabilized) property

(E) All of the above is true

Answer 1

all of the given statements are true about bank financing as the interest which is payable on Bank financing is tax deductible and Bank generally prefers to provide loans to construction properties because they have a high collateral

A higher LTV loan has a greater risk and Bank always prefer higher Debt service coverage ratio as it will help them to gain a sense of security against the borrower repayment ability.

Hence the correct answer is option (E) all of the above is true.