Glossary Of Terms

GLOSSARY OF COMMERCIAL LENDING TERMS

-A-

ADJUSTABLE RATE MORTGAGE – also known as an “ARM” loan, is a mortgage with an interest rate that changes after a certain number of years.

 

AMORTIZATION PERIOD – the number of years during which the principal portion of a mortgage loan is scheduled to be paid down through monthly payments.

ANCHOR – a tenant that is long term and credit worthy.  An anchor (such as a supermarket or major retailer) increases the value and the ability to obtain financing for a shopping center. 

APPRAISAL – a written report detailing the value of a property, made by a qualified professional called an appraiser.

ASSUMABLE – a mortgage loan which can be transferred to another person without a change in the terms of the loan.

- B –

BALLOON PAYMENT
 – a final payment for the remaining principal balance of a mortgage, due after a certain number of years.

BASIS POINT (BP) – 1/100th of 1%.  One basis point equals 0.01%. 

BORROWING ENTITY TYPE – the legal form under which property is owned.  Examples include: LLC, Corporation, Partnership and Individual.

BRIDGE LOAN – a short-term loan for borrowers who may not qualify for traditional long term financing.

- C -

CAP – the annual maximum which an adjustable mortgage rate may increase at each adjustment period.

CAPITAL EXPENDITURES – long term improvements made to a property and amortized over many years.  Not to be confused with regular or periodic maintenance.

 

CAPITALIZATION RATE – net operating income divided by the value of the property.

CARVE OUT – the exceptions to “non-recourse” for fraud and misrepresentation in loan documents.

CASH–OUT REFINANCE – when a refinance for more than the outstanding loan balance is made resulting in extra funds to the borrower.

 

CLOSING – the meeting between the buyer and seller (for a purchase) or borrower and lender (for a refinance) when documents are signed.

CLOSING COSTS – the costs and fees associated with the mortgage transaction.

CMBS (Commercial Mortgage Backed Security) – also called a “Conduit Loan” is a loan sold into a mortgage pool and securitized through the sale of bonds by investment bankers.

 

COMPARATIVE MARKET ANALYSIS – a written estimate of a property’s value based on the sale of properties with similar characteristics.

CONSTRUCTION LOAN – a short term loan, usually made by a local bank, to pay for the construction of commercial buildings. 

 

CREDIT TENANT – a tenant with a debt rating by S&P or Moody’s of "BBB-" or better.

CREDIT TENANT NET LEASE – a lease with a credit tenant.  Examples include CVS and Walgreens. 

 

- D -

DEBT SERVICE – the amount of cash flow dedicated to making loan payments on the mortgage.              

DEBT SERVICE COVERAGE RATIO – the net operating income divided by the mortgage payment.  A DSCR > 1.00 shows a cash positive property.  A DSCR < 1.00 shows a property operating in the negative.

 

DEFEASANCE – a prepayment option obligating the borrower to pay the difference between the note rate and the current rate on like term treasury securities.  In addition, the borrower must provide these securities to the lender to replace the mortgage.

 

DUE DILIGENCE – a lender’s examination and verification of all borrower supplied documentation and third party reports prior to issuing a commitment letter.

 

- E -

EFFECTIVE GROSS INCOME – the gross income of a building after vacancy allowance, as determined by an underwriter.

 

ENGINEERING REPORT – a written report prepared by a professional summarizing the current physical condition of the property. The report is used to determine the physical needs of the property.

ENVIRONMENTAL REPORT – a written report by an environmental firm to determine potential environmental hazards in a building or surrounding area.

ESCROW – an account set up to pay building expenses as they become due.  Examples include: taxes, insurance, and repairs.

 

- F -

FIXED RATE MORTGAGE – a mortgage with an interest rate that does not adjust to market conditions.

FORECLOSURE – the process by which a lender takes back a property on which the mortgage has defaulted. A service may take over a property from a borrower on behalf of a lender. A property usually goes into the process of foreclosure if payments are more than 90 days past due.

- G -

GENERAL PARTNER – a partner whose liability is not limited. All partners in an regular partnership are general partners. A limited partnership must have at least one general partner.

GOOD FAITH DEPOSIT – an upfront deposit made by a borrower or purchaser of real estate to evidence a sincere interest in moving forward with the transaction.

GOVERNMENT SUBSIDIZED – rents that are partly paid by a governmental agency. Examples include Section 8 and HAP contracts.

- H -

- I -

INDUSTRIAL BUILDING – property used for industrial purposes, such as a warehouse or manufacturing facility.

INTEREST RATE – the percentage charged by a lender for the ability to borrow money.

INTEREST RATE CAP – the maximum that an interest rate may rise at an adjustment period.

 

- J -

 

- K -

 

- L -

LEASE TYPE – examples include triple net, net, and gross.  Used to determine who pays expenses: the landlord or the tenant.

LESSEE – the tenant in a commercial property.

 

LESSOR – the landlord in a commercial property.

LIMITED LIABILITY COMPANY (LLC) – similar to a corporation in that liability is incurred by the entity and not the individual owners.

 

LIMITED PARTNER – a partner whose liability is restricted to his original investment.

 

LOAN–TO–VALUE RATIO (LTV) – the mortgage amount divided by the value of the property, expressed as a percentage.

 

LOCK–OUT PERIOD – an initial period of the loan term during which prepayment of the loan is not permitted.

 

- M -

MANAGEMENT FEE – the fee paid to a professional for handling a building’s leasing and operations.

 

MARGIN – an amount added to an index to determine the rate charged to the borrower.

MATURITY – the date when a loan becomes due and payable.

 

MEZZANINE LOAN – a second mortgage on a property.

MIXED USE – a property that contains residential as well as commercial space.

- N -

NET OPERATING INCOME (NOI) – operating income minus expenses, but before debt service.

NET LEASE – an arrangement where the tenant is responsible for a portion of the building’s expenses.

 

NON RECOURSE – no personal guarantee is required by the borrower (usual exceptions are fraud and misrepresentation)

 

- O -

OPERATING EXPENSES – costs associated with the running of the property on a daily basis, such as taxes and utilities.  Excludes long term capital improvements.

 

ORIGINATION FEE  an expense charged by a lender to make the loan.

 

- P -

PHASE I – a type of environmental report used to determine if a property had a past exposure to dangerous chemicals.

PREPAYMENT PENALTY – a fee paid by a borrower if a loan is paid off before maturity.

PRINCIPAL – the amount of the loan excluding interest.

- Q -
 
- R -

RECOURSE – personal liability of the borrower.

REFINANCE – to use the proceeds of a new loan to pay off an existing loan balance.

RENT ROLL – a schedule of a building’s tenants, rents paid, and lease information.

REPLACEMENT RESERVES – an amount escrowed with the loan payments to cover repairs.

- S -

SECOND MORTGAGE – a mortgage that is junior in lien priority to the first mortgage.

SECONDARY MORTGAGE MARKET – a process which allows loans originated by one lender to be sold or traded with other lenders, the purpose of which is to create liquidity for additional lending.

 

SELF LIQUIDATING MORTGAGE – a loan that pays down to zero at the conclusion of the term, without a balloon payment.

 

SHADOW ANCHORED – a shopping center in close proximity to a major tenant.

SOLE PROPRIETORSHIP – one single owner as an individual, and not an entity like a corporation.

STABILIZED – a property with a predictable income and expense history.

 

STRIP CENTER – a row of commercial stores, usually without an anchor tenant.

- T -

TENANT – a lessee that signs a lease in an apartment or commercial building.

TERM – the length of a mortgage before maturity.

THIRD PARTY COSTS – fees collected by a lender to pay for actual expenses, such as appraisal and title.

 

TRIPLE NET LEASE (NNN) – an arrangement where the tenant is responsible for ALL of the building’s expenses, including: taxes, insurance, utilities, and repairs.

- U -

UNANCHORED – a shopping center that does not contain a major tenant such as a supermarket or large retailer.

UNDERWRITING – the process used by a lender to determine whether a loan request meets the lender’s guidelines for funding.

 

- V -

VACANCY – the amount of space (or number of units) that are not rented

 

- W -

- X -

 

- Y –

YIELD MAINTENANCE
 – a prepayment option obligating the borrower to pay the difference between the note rate and the current rate on like term U.S. treasury securities.

 

- Z -