If an Investor Owned an Equity Position in a Building

question 21

Multiple Choice

If an investor owned an equity position in a building and wanted to increase value using leverage he could do so by either leveraging the property or borrowing personally.However,leverage is usually applied at the property,not the personal level because:

• A) the investor could make the personal loan against cash flows from the property,leaving the property available as collateral for additional loans
• B) the investor cannot take personal loans to leverage an increased value based on cash flows
• C) leverage can be created cheaply from personal loans; it is not added value
• D) personal loans cannot be applied to cash flows; only to real property

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Definitions:

Pledging Agreement

An agreement where a borrower pledges an asset as collateral to secure a loan, ensuring the lender can seize the asset if the loan defaults.

Warehousing

In finance, a method of securing the lender’s interest when borrowing is secured by inventories. The inventory is placed in a warehouse operated by a third party. When it is drawn out of the warehouse by the borrower, a pro rata share of payment on the loan is due.

Legal Control

The power or authority to direct the management and policies of a company or organization, typically through ownership of voting shares or by contract.

Trade Payables

Money owed by a business to its suppliers or creditors for goods and services purchased on credit.