© 2003 - 2018 by Global CommercialBanc Corp  |  NMLS #389427

Adjustable Rate Mortgage (ARM) - Refers to a loan that does not have a fixed rate of interest over the life of the loan. Such a loan typically uses an index and some base rate for establishing the interest rate for each relevant period. One of the most common rates to use as the basis for applying interest rates is the London Inter-bank Offered Rate, or LIBOR (the rates at which large banks lend to each other).

 

Amortization – The decrease of a loan balance due to periodic installments paid on the principal and interest.

 

Assumable Loan – A loan that can be transferred to a qualified buyer subject to Lenders approval and upon payment of the applicable assumption fee (typically 1%). The new buyer will then assume the loan based on the existing remaining loan terms.

 

Balloon Payment Mortgage - A mortgage which does not fully amortize over the term of the note, thus leaving a balance due at maturity.

 

Borrower – A person, individuals or entity that is obtaining the loan. Typically the “Borrower” is referred to as the person, individuals or entity that will hold title.

 

Bridge Loan - A short-term interim loan, often at a higher than market interest rate and with larger than usual origination fees (points), used to quickly effect the purchase of real property while pursuing more conventional longer term real estate financing.

 

Business Financial Statement – A document that includes the assets & liabilities of a Company (Corporation, LLC, Partnership, Trust, etc). This sometimes is also referred to as a Balance Sheet.

 

Capitalization Rate (or "Cap Rate") - is the ratio between the net operating income produced by the property and its capital cost (the original price paid to buy the asset) or alternatively its current market value. Cap Rates provide a tool for investors to use for roughly valuing a property based on its net operating income. For example, if property provides $160,000 a year in Net Operating Income and similar properties have sold based on 8% cap rates, the subject property can be roughly valued at $2,000,000 because $160,000 divided by 8% (0.08) equals $2,000,000. A comparatively lower cap rate for a property would indicate a higher property value, and a comparatively higher cap rate for a property would indicate a lower property value. Please visit our Cap Rate Calculator as a helpful tool.

 

Commercial Mortgage-Backed Securities (CMBS) - A type of asset-backed security that is secured by a commercial mortgage or collection of commercial mortgages. These securities are grouped and rated by an accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. The underlying commercial mortgages must have originated from regulated and authorized financial institutions.

 

Debt Service – This is known as the mortgage payments (principal & interest).

 

Debt Service Coverage Ratio (DSCR) – The DSCR is used to determine a property’s ability to generate enough income after all expenses to cover the debt service. To calculate the DSCR, the Net Operating Income is divided by Debt Service. The minimum DSCR typically needs to be at least 1.25 however, is dependent on the particular loan platform. Please visit our DSCR Calculator as a helpful tool.

 

Defeasance Fee - To defease is a Prepayment Penalty that occurs in a commercial loan when a securitized commercial mortgage loan is paid off earlier than the specified maturity date. The penalty is a function of the cost to purchase a portfolio of securities that replicates the loan's remaining debt service schedule. Defeasance is typically associated with CMBS.

 

Fixed Rate Mortgage - A loan that reflects an interest rate that remains constant for the entire fixed term.

 

Global’s Team – Refers to a 2-3 Member Team that is assigned to every loan/borrower. The Team can consists of a Commercial Mortgage Banker, Transaction Coordinator and Department Manager. The Commercial Mortgage Banker will discuss the right Platform that will fit the borrowers financing needs and gather the initial due diligence items to issue a LOI. The Transaction Coordinator is the main point of contact through the underwriting and closing process. The Transaction Coordinator will assist with opening title, obtaining insurance info, scheduling third party report site inspections and gathering the underwriting due diligence. Overseeing all of this from start to finish, is the Department Manager. There are always at a minimum, 2 Members assigned to every loan request which allows for a speedy and smooth loan process.

 

Gross Potential Rents (GPR) – Is the projected revenue of a property assuming all units are occupied at all times.

 

Guarantor - Means, individually and collectively, any guarantor of the Indebtedness or any other obligation of Borrower under any Loan Document.

 

Holdback Funds - Refers to monies held back by a Lender from a loan until such time as certain conditions at the property are met (i.e., the completion of certain immediate repairs post closing).

 

Immediate Repairs – Repairs that are determined from the Engineer or Appraisal Reports. These repairs can include any life safety/hazardous repairs or other repairs that the property is in need of. Immediate Repairs are completed prior to closing and/or post closing.

 

Initial Due Diligence Items – Means the initial items your Commercial Mortgage Banker will obtain in order to see if the property cash flows and the borrower meets certain loan criteria. Upon review and satisfaction of these items, a LOI can be issued. Most often, the standard items requested are 2 Year Prior P & L’s, YTD P & L, Current Rent Roll, Handful of Interior & Exterior Photos and a PFS for the KP(s).

 

Key Principal (KP) – Means the natural person(s) or entity that Controls Borrower that Lender determines is critical to the successful operation and management of Borrower and the Mortgaged Property. The “Key Principals” are always underwritten on the loan.

 

Loan Documents - Means the Note, the Loan Agreement, the Security Instrument, the Environmental Indemnity Agreement, the Guaranty, all guaranties, all indemnity agreements, all Collateral Agreements, all O&M Plans, and any other documents now or in the future executed by Borrower, Guarantor, Key Principal, any other guarantor or any other Person in connection with the Mortgage Loan, as such documents may be amended, restated, replaced, supplemented or otherwise modified from time to time.

Loan Platforms – Refers to the various loan options available for multifamily or commercial properties. These Platforms consist of Fannie Mae, Freddie Mac, FHA/HUD, Conduit (CMBS), Bridge and Bank Platforms. Each Platform has particular guidelines that must be met.

 

Loan Proceeds - The net amount of funds disbursed by a Lender to a Borrower (after the deduction of loan costs, title costs fees and other transactional expenses).

 

Loan to Value (LTV) – The ratio between the loan amount and appraised value or sales prices (whichever is the lesser of the two) on a property. For example, if the loan amount is $1,000,000 and the appraised value is $2,225,000 but the sales price is $2,000,000, the LTV will be 50% and based on the sales price since it is lower than the appraised value.

 

Letter of Interest (LOI) – Refers to a document in which the Lender will issue as an expression of interest in considering the loan request. The LOI is not intended to convey or constitute a final commitment or agreement to lend, but rather to summarize the loan terms that the Lender is interested in considering based upon the initial due diligence items presented. This is sometimes also referred to as a Term Sheet, Letter of Intent or Loan Application.

 

Mezzanine Loans - Typically refers to secondary financing on a project, similar in purpose to a second mortgage, except that a mezzanine loan is secured by the equity interests of the company that owns the property, as opposed to the real estate. If the company fails to make the payments on the loan, the mezzanine lender can generally foreclose on the equity in a much simpler and expedited time in comparison to the often complex and timely mortgage foreclosure process. Once lender owns the company that owns the property it controls the property

 

Mortgage - An instrument that creates a voluntary lien on real property to secure repayment of a debt. The parties to a mortgage are the mortgagor (borrower) and the mortgagee (lender).

 

Mortgagee – A Lender who accepts a mortgage as security for repayment of the loan.

 

Mortgagor – A person who borrows money and gives a mortgage to the Lender as security.

 

Net Operating Income (NOI) - A property's operating income after all operating expenses are deducted. NOI calculations do not include any debt service figures or depreciation.  The NOI is imperative when determining if a property cash flows positively or not.

 

Net Worth – The overall financial picture of a KP. This is calculated by subtracting the liabilities from the assets. With most loan circumstances, the Net Worth of the KP’s must be at least equal to the loan amount being requested.

 

Non-Recourse Loan - A type of loan that is secured by collateral (the subject property). If the Borrower defaults, the Lender can seize the collateral, but cannot seek out the Borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount. Essentially, the borrower does not have personal liability for the loan. There are standard non-recourse carve outs that include “bad boy behaviors”.

 

P & I Payments – A typical monthly mortgage payment that includes only the Principal and Interest Payments. PITI includes Principal, Interest, Taxes & Insurance.

 

Permanent Loan - Means long-term financing for real property that has achieved Stabilization (i.e. after construction loans).

 

Personal Financial Statement (PFS) – A document that includes the assets & liabilities of the person applying for the loan. This is needed on any loan request in order to assure the Lender that the KP meets the minimum Net Worth requirement.

Prepayment Penalty (Prepay) – A clause in the Mortgage Loan that refers to a penalty paid to the Lender in the event a mortgage is paid off earlier than the specified maturity date. The Prepay can either be a Stepdown, Yield Maintenance or Defeasance.

 

Prepayment Period - A clause in Mortgage Loan that says if the mortgage is prepaid within a certain time period, a penalty will be assessed. Most commonly, the penalty may be a step down or based on yield maintenance.

 

Profit & Loss Statement (P & L) – A document that includes the profits (income) and losses (expenses) of the property. Also known as Income & Expense (I & E Statement). This is needed in order to cash flow a property.

 

Recourse Loan - A type of loan that allows a Lender to seek financial damages if the Borrower fails to pay the liability, and if the value of the underlying asset is not enough to cover it. A recourse loan allows the Lender to go after the debtor's assets that were not used as loan collateral in case of default.

 

Rent Roll – This is a document that details the rental income of a property. A Rent Roll must include unit numbers, tenant names, all vacant units, unit type (i.e., number of bedrooms/bathrooms), unit square footage, rent amount and lease dates.

 

Schedule of Real Estate Owned (SREO) – This is a document that outlines all the pieces of real estate that a KP owns.

 

Secondary Mortgage Market – The private investors and government agencies that buy and sell real estate mortgages.

 

Securitization - The process pursuant to which mortgage loans are purchased from banks and other lenders and assigned to a trust, assembled into collections or "pools", then securitized through the issuance of Mortgage-backed Securities.

 

Single Asset Entity (SAE) – Means an entity must only own and operate a particular property (our subject property).  This is also known as a Single Purpose Entity and the only business purpose of the entity is the ownership and operation of the subject property.

 

Sizing - Means a determination of the loan amount based on P & L Statements, the Appraisal, and other underwriting data. The sizing process is also referred to as “cash flow analysis”.

 

Stabilization - Means the point at which a project, development or acquisition has become income-producing real estate by achieving a certain level of completion, lease-up and/or net income. Typically, the requirements for a Fannie Mae loan is that the property must be stabilized at 90% occupancy for at least 90 days.

 

Stepdown Prepay – Is a Prepayment Penalty paid to the Lender if the mortgage is paid off earlier than the specified maturity date. The penalty is graduated and steps down each subsequent year. For example, 5% in the first year that prepayment is allowed, 4% in the second, 3% in the third year, 2% in the fourth year and 1% in the last year. This is the most common Prepay within the Bank Platforms. Please visit our Stepdown Prepay Calculator as a helpful tool.

 

Supplemental Financing – Refers to a second lien in which Fannie Mae allows their borrower to take out 12 months after the closing of the latest placed prior lien at the Lenders discretion.  The term of the supplemental loan will be coterminous with the first. No more than one supplemental loan may be placed on the property during the term of the first mortgage lien.  All supplemental financing requires new sizing and the property & borrower must be the Lenders requirements. Supplemental Financing is most common with Fannie Mae loans, however, is also often allowed with some Bank Platforms.

 

Third Party Reports – Refers to any reports that the Lender requires for the Loan; i.e., Appraisal, Environmental, Phase I, Phase II, Property Condition Assessment (PCA), Probable Maximum Loss (PML), etc.

 

Underwriting Due Diligence - The loan process that includes obtaining third party reports, title work, insurance, legal items and underwriting items. This includes an analysis of the PFS, SREO, P & L Statements, Rent Rolls and other property related documents.

 

Yield Maintenance (YM) – Is a Prepayment Penalty paid to the Lender if the mortgage is paid off earlier than the specified maturity date. YM Prepay, shall be the greater of 1% of the outstanding loan balance or by a formula used that calculates the current value of the remaining loan payments that is multiplied by the difference between the current loans interest rate and the rate on a Treasury note of the same duration. YM is typically associated with Fannie Mae loans. Please visit our Yield Maintenance Calculator as a helpful tool.

Basic Terms Used in Commercial Financing