Originating, Underwriting, Structuring and Managing Property Loans
Julian R. Sterling
One Excel workbook. Chapter 7 ends by asking whether you can state the risk-adjusted return
on capital for your last three loans, or only the margins. This answers it. It is free.
Nothing is gated behind a sign-up, and no email address is asked for.
The chapter’s own two loans, with figures on them. A tight senior loan at 200 basis points
against a wide whole loan at 550. Apply the four deductions the chapter names — cost of
funds, expected loss, operating cost, capital held — and the ranking barely survives.
Gross margin says the whole loan wins by 350 basis points, nearly three times.
Return on capital says it wins by 3.4 points, a tenth. The margin overstates the
advantage by roughly seventeen times. That is what the chapter means by a
business that manages to gross margin selecting the wrong deals — and at that size the
distortion does not merely blur the ranking, on a slightly different pair it reverses it.
And the wide margin is a position on an estimate. Raise the default probability from 3.00 to
4.36 per cent and the whole loan ties with the senior one. A margin for error of
1.45× — inside the range any honest analyst would put around a PD. Meanwhile the
objection people actually raise, that it is three times the work, turns out not to bite until it
costs nearly six times as much to run.
The floor, priced. The clause the chapter says gets conceded when everyone is
tired costs the borrower nothing on the day. If the reference rate falls 150 basis points, it
earns 750,000 a year — three quarters of the senior loan’s entire
credit margin. The negotiator who gives it away at eleven o’clock has given away more than
the credit team gained by pricing the risk correctly.
And early repayment, where the surprise is instructive. On the loan alone, an
early exit makes the lender more money — 39.4 per cent against 34.1 — because
the arrangement fee annualises over a shorter life. So the chapter’s warning is not about
the loan; it is about the five words at the end of it, at a compressed margin. Run the
round trip and the lender can absorb just 13 basis points of compression on the
replacement loan before the early exit costs real money.
Which reframes prepayment protection entirely: not a penalty, not a windfall, but
the amount of margin compression the lender can survive — about forty basis
points of tolerance for every hundred of protection. Sixteen checks.
The_Return_the_Lender_Earns.xlsx · XLSX · 17 KB
What to try first
Set both risk weights to 100 per cent — the unregulated fund case — and look again. Then
put your own funding spread in. Most lenders discover that the ranking of their last three loans
depends more on the capital line than on anything discussed at credit committee, which is
precisely the chapter’s argument and much more persuasive as your own numbers.
What the arithmetic does not settle
It cannot tell you the probability of default, which is the input the whole comparison turns on and
the one nobody can observe. It cannot price the risk a team is not equipped to manage — the
chapter’s sharpest point, and the one no model captures. And capital treatment differs by
lender type and jurisdiction, which is why the book avoids naming regimes. The arithmetic holds in
any regime; only the inputs change.
Conventions used throughout
Amber fill
an input — you may edit these
Grey fill
a formula — do not overtype these
Checks sheet
sixteen controls, each stating its own verdict
Every figure is illustrative, as everything in the book is. The loans, the sponsor, the funding
cost and the risk weights are invented. The arithmetic is not.
Opening the file
The workbook opens in Microsoft Excel, LibreOffice Calc, Google Sheets and Numbers. It uses no
macros and no add-ins, so nothing needs to be enabled or trusted. If your spreadsheet asks to
update links on opening, decline — there are none.
Also by Julian R. Sterling
The other books with companion files. The full list of titles is on the
author page.
Closing the DealTwo defensible bridges 20.70 million apart, a peg worth 7.00 million, and the six choices that remove 6.60 of a 12.00 earn-out.
CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
How to Read a Credit AgreementWhere the default actually comes from, the cure that costs 5.5 times the other, and the capacity nobody adds up.
How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
REIT Analysis and ValuationFFO of 532.0, AFFO of 381.0, net asset value and dividend safety — every figure a formula you can change.
Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
The Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
Construction Cost ControlA contract sum of 26,301,102 became a final account of 29,153,363 on the building that was drawn — and 85.8 per cent of what was lost was knowable on the day it was signed.
Pricing StrategyA list price of 148.00, a pocket price of 112.51, and the nine deductions in between — with what one point of price is actually worth.
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