Page 178 - Trump University Commercial Real Estate 101

TRUMP UNIVERSITY COMMERCIAL REAL ESTATE 101

Three Types of Risk

In any real estate transaction, there will be different amounts of three
types of risk.

Business Risk

This stems from making poor business decisions. They could be your
judgments, for example, when you hire the wrong management com-
pany and your income suffers because of it.
Your management company, in turn, may be making bad judg-
ments in the form of ineffective tenant screening and inconsistent rent
collection practices.
In either case, it ’ s important to recognize these errors early on and
fix them quickly.

Financial Risk

This relates to the borrowed funds used to purchase the property.
We already discussed the risk of over - leveraging your property. It ’ s
important to consider the amortization of the debt, too — in other
words, how the debt will be paid off.
Most commercial loans feature a balloon payment. For example,
you may arrange for a loan that has payments calculated as if it will
stretch over 25 years. That would be 25 - year amortization. However,
the loan would include a balloon payment somewhere between fi ve to
ten years from inception. Let ’ s say it ’ s seven years: In that case, the fi rst
seven years of the loan would have relatively low payments, as if it
were to take 25 years to pay off. Then, in year seven, all remaining
principal will come due.
This form of financing results in more manageable payments during

those seven years. The risk is that, at the end of the balloon period, you
do not have the money to pay off the note. There are many reasons why
you may not have the full amount: For example, the value of the prop-
erty may actually decline rather than increase in seven years ’ time.

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