CFA Level I · CFA Level I Exam · Real Estate and Infrastructure
An investor holds a commercial mortgage loan secured by an office building. Relative to an investor holding equity ownership of the same building, the mortgage investor most likely:
The mortgage investor most likely has a claim ranking ahead of the equity owner in default. Lenders receive contractual interest and principal with priority, while equity owners capture appreciation and bear first losses when property value falls.
- Ahas a claim ranking ahead of the equity owner in the event of defaultCorrect
- Bparticipates fully in any appreciation of the property value
- Cbears the first loss if the property value declines
Explanation
Debt is senior to equity, so the lender is paid first from sale proceeds. Equity holders capture upside and absorb first losses; the lender's return is mainly contractual interest.
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