| e Capital, Finance Glossary: Absorption Rate The rate (speed) at which vacant space is either leased or sold to users in the marketplace. This rate is usually expressed in square feet per year or in the case of multi-family housing, in the number of units per year. Abstraction Method This method of estimating the value of property uses similar properties available in the same market to extract the value of a parcel of land. Acceleration Clause A provision in a mortgage that gives the lender the right to demand immediate payment of the outstanding loan balance under certain circumstances. Usually when the borrower defaults on the loan. Accessory Building A building separate from the main structure on a property. Often used for a specific purpose, such as a workshop, storage shed or garage. Accretion The natural growth of a piece of land resulting from forces of nature Accual Age The amount of time that has passed since a building or other structure was built. See also: EFFECTIVE AGE Acquisition and Development Loan A&D Loan A loan for the purchase and preparation of raw land for development. Usually a construction loan or land sale is the source of repayment. Adjustment Date The date the interest rate changes on an adjustable rate mortgage. Adjustable Rate Mortgage ARM A type of real estate loan in which either the interest rate charged or the length of the loan, or both, can change. This type of loan forces the Borrower to absorb the uncertainty of changes in interest rates during the life of the loan. ARM loans are normally tied to some index such as government securities. Also called variable rate mortgages. Ad Valorem Tax A tax based on the assessed value of real estate or personal property. In other words, ad valorem taxes can be property tax or even duty on imported items. Property ad valorem taxes are the major source of revenues for state and municipal governments. Amortization The repayment of a mortgage debt over a period of time in a series of periodic installments. It should be noted that a portion of each payment consists of a blend of interest and amortization of principal. Specifically, this is the payback of the principal portion of the loan owed to the lender. The effect of amortization is to build up the paper value of the owner's equity while reducing the debt obligation. Anchor Tenant A well-known commercial retail business such as a national chain store or regional department store (AAA Tenant) strategically placed in a shopping center so as to generate the most customers for all of the stores located in the shopping center. Anchored Centers A shopping center with an anchor tenant. Annual Loan Constant Theratio of the annual debt payment on a loan to the original amount borrowed. The loan constant is also referred to as a mortgage constant. Appraised Value An opinion of the fair market value of a property as developed by a licensed, certified appraiser following accepted appraisal principals. Arbitrage The simultaneous buying and selling of any securities, including mortgages, mortgage backed securities or futures contracts in different market places, for the purpose of realizing a profit from different prices. Asset Based Loans Asset-based facilities consist of revolving lines of credit and term loans backed by and secured by accounts receivables, inventory, machinery and equipment, real estate, and other assets. Assessment The function of assigning a value to a property for the purpose of levying taxes. Attornment A tenant’s formal agreement to be a tenant of a new landlord. Average Daily Rate ADR The average rate charged by a hotel for one (1) room for one (1) day; arrived at by dividing the total room revenue by the actual rooms occupied. Average Life It is a way to look at the term of a loan or bond that accounts for principal paydowns. If a loan is interest only with a full balloon at the end, the average life will equal the maturity. If there is amortization, principal is being paid over the life of the loan, decreasing the balloon payment and the average life. This number is then used to find the treasury that has the closest remaining term, but is not shorter. For example, a 10/25 loan has an average life of 9 years. 9 years from today is October 2008. The current list of outstanding, non-callable US treasury securities with maturities in 2008 includes March 2008, June 2008, September 2008 and a December 2008. The lender would choose the December 2008 because it is longer than the actual due date. Basis Points One basis point is equal to one-one hundredth of a percentage point; thus 300 basis points is equal to 3%. Used primarily to describe changes in yield or price on debt instruments including mortgages and mortgage-backed securities. Bidding Cycle In order for a transaction to be posted within the NetFunding.com e-Marketplace for lender bidding, the borrower must sign a Placement Agreement guaranteeing the transaction’s availability for a minimum period of time. This period of time is ten days initially and can be extended by the borrower. The period of time the Posting Package is being reviewed by Lenders is called the Bidding Cycle. Bond Enhancement Where a tangible asset enhancement, in addition to the governmental authority guaranty, collateralizes a bond issue. This additional collateral can be in the form of a letter of credit, cash deposit or other readily convertible asset. This improves the marketability of the bond issue and lowers the interest rate. Bridge Loan A loan which enables a buyer to purchase a property, then allow for time to rehab and/or increase NOI prior to placement of permanent financing or enables buyer to get financing to make a down payment and pay closing costs before selling the present property. Also called gap financing. Capital (Reserves) Expenditure CAP-X A major improvement that will have a life of more than one year. Capital expenditures are generally depreciated over their useful life, as distinguished from operational repairs, which are subtracted from income during the year in which they were expended. Capitalization The conversion of a future net income stream into present value by using a specified desired rate of earnings as a discount rate. This capitalization rate is divided into the expected periodic income to derive a capital value for the expected income. Capitalization Rate The rate of return on net operating income considered acceptable for an investor. A rate of return used to derive the capital value of an income stream. The formula is Value = annual income divided by the capitalization rate. Also known as cap rate. Carve-outs Specific items that a Lender will require the Borrower to personally guarantee for the life of the loan. Typically include (but are not limited to) environmental, fraud, misappropriation of funds, and theft. Closing Costs Various fees and expenses payable by the seller and buyer at the time of a real estate closing, (also termed transaction costs). Includes brokerage commissions, lender fees, title insurance, recording fees, prepayment penalty, inspection and appraisal fees, and attorney fees. Closing Checklist A list of information needed by the Lender prior to Loan Closing. This list is usually generated at the time when a Loan Commitment is issued. Collateral An asset which is placed at risk to secure the repayment of a loan. Commercial Bank A financial institution authorized to provide a variety of financial services, including consumer and business loans (generally short-term with full recourse to the Borrower). Commercial banks may be members of the Federal Reserve System. Commercial Real Estate Typically defined as income producing real estate. This can include vacant land that has been zoned for commercial use. It does not include single family residences, government owned facilities, agricultural operations or any other installations that would be considered “businesses” instead of simply income producing real estate. Commitment Fee A charge required by a lender to lock in specific terms on a loan at the time of Commitment. Commitment Letter An official notification from a Lender to a Borrower indicating that the Borrower's loan application has been approved. It will state in detail the terms and conditions of the prospective loan. Common Area Maintenance Operational expenses related to the maintenance of retail and office properties. Under a Triple-Net lease the Tenant is required to reimburse the Landlord for their proportionate amount (based on square footage) of this expense. Comparables An abbreviated term used by appraisers to describe properties which are similar in size, condition, location and amenities to a subject property whose value is being determined. The Uniform Standards of Professional Appraisal Practice (USPAP) establish clear guidelines for determining a comparable property. Conduit An entity which issues mortgage-backed securities backed by mortgages which were originated by other lenders. Conduit (Securitized) Lender A lender who generates loans to be sold on a secondary market. The profit for this Lender is derived from Commitment Fees and profits made in the secondary loan markets. Constant Percentage of the original loan paid in equal annual payments that provides principal reduction and interest payments over the life of the loan. Construction Loan A short-term, interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as work progresses. Typically a recourse loan to the borrower. Consumer Price Index The most widely known measures of price levels and inflation that are reported to the U. S. government. It measures and compares, on a monthly basis, the total cost of a statistically determined "typical market basket" of goods and services consumed by U. S. households. Correspondent A specialized type of mortgage banker whose function is limited to the origination of mortgage loans which are sold to other mortgage bankers or investment bankers under a specific commitment. Cost Approach A method of appraising property based on the depreciated reproduction or replacement cost (new) of improvements, plus the market value of the site. Credit Rating An evaluation of a person's capacity (or history) of debt repayment. Generally available for individuals from a local retail credit association; for publicly held companies by such firms as Dunn & Bradstreet; and for bonds by such firms as Moody's, Standard & Poor’s, and Fitch's. Cross-Collateralization Net income shortfalls on one property are offset by excess cash flow from other properties in a pool of crossed loans. Significantly enhances a transaction from the viewpoint of investors and rating agencies. Current Yield A measurement of investment returns based on the percentage relationship of annual cash income to the investment cost. Debenture Bond A long-term bond or note issued by governments and/or corporations and not secured by a mortgage or lien on any specific property. Since there is no specific property securing the debenture, the ability to repay the debt is based solely on the financial strength of the issuer. Debt Service Coverage Ratio DSCR The relationship between the annual net operating income (NOI) of a property and the annual debt service of the mortgage loan on the property. Both Lenders and Investors calculate this ratio to assist them in determining the likelihood of the property generating enough income to pay the mortgage payments. From the lender's viewpoint, the higher the ratio, the better. Debt Service The periodic payment (monthly, quarterly, semi-annually or annually) to the Lender. This payment will include interest expense and many times Principal Payments (Amortization) over a longer term (usually 25-30 years). These amounts combine to form Loan Debt Service. Deed of Trust The deed to real property which serves the same purpose as a mortgage but instead of two parties, three parties are involved. The third party holds title for the benefit of the Lender. The Lender is called the “Beneficiaryâ€�. The Borrower is called the “Trustorâ€�. When a loan is made, the Borrower conveys title to a third party called the Trustee who holds the title for the benefit of the Lender although the instrument itself may remain in the Lender's possession. Defeasance In defeasance, the lender replaces the cash flows of the original loan with actual Treasury Securities. The borrower pays the lender enough money to buy these securities and the lender goes out in the bond market and buys the right combination of bonds. After this is done, and the lender has a security interest in the treasuries, the property is released as collateral for the loan and the treasuries become the new loan collateral. Discount Rate The rate of interest charged to banks who buy money from the Federal Reserve System. An increase in the rate not only discourages the banks from borrowing, but it also serves as a signal that interest rates are probably going to increase. Also, a compound interest rate used to convert expected future income into a present value income. EBITDA Earnings Before Interest, Taxes, Depreciation, and Amortization. An indicator of a company's financial performance calculated as: = Revenue - Expenses (excluding tax, interest, depreciation, and amortization) EBITDA can be used to analyze the profitability between companies and industries, because it eliminates the effects of financing and accounting decisions. EBITDA first came into common use with leveraged buyouts in the '80s, where it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods of time. EBITDA is now commonly quoted by many companies, especially in the technology sector, even when it isn't warranted. Consequently, EBITDA is being used as an accounting gimmick to dress up a company's earnings. A common misconception is that EBITDA represents cash earnings. EBITDA is good metric to evaluate profitability, The idea behind EBITDA -- to give investors a sense of how much money a young or fast-growing company is generating before it shells it all out to creditors, Uncle Sam, etc. If EBITDA grows over time, it gives investors at least some sense of future potential profitability, which is why some investors look at "EBITDA margin" as a substitute for net margins. If you want to go a step further, look at free cash flow (FCF). In its simplest form, FCF is simply cash from operations, minus capital expenditures. This has the advantage of capturing at least three items EBITDA leaves out: receivables, inventory, and capital expenditures (property, plant, and equipment). Effective Gross Income EGI Term used for an income-producing property, derived from the potential gross income, less a vacancy factor and a collection loss amount. Equity Participation The right of a Lender to a share in the gross profits, net profits or net proceeds in the event of a sale or refinance of a property on which the Lender has made a loan. Also known as an equity kicker. Earnest Money Deposit A cash deposit made to a home seller to secure an offer to buy the property. This amount is often forfeited if the buyer decides to withdraw his offer. Easement The right of a non-owner of property to exert control over a portion or all of the property. For example, power companies often own an easement over residential properties for access to their power lines. Eminent Domain The legal process whereby a government can take ownership of a piece of property in order to convert it to public use. Often, the property owner is paid fair-market value for the property. Equity The difference between the fair market value of a property and that amount an owner owes on any mortgages or loans secured by the property. Escrow An amount retained by a third party in a trust to meet a future obligation. Often used in the payment of annual taxes or insurance for real property. Estoppel Certificate A document by which a tenant certifies to a Lender that all rental amounts due and owing are current, and that the Landlord is in compliance with all terms and conditions of the Lease. Also, a document by which the mortgagor (borrower) certifies that the mortgage debt is a lien for the amount stated. The debtor is thereafter prevented from claiming that the balance due differs from the amount stated. Expense Ratio A comparison of the operating expenses to potential gross income. This ratio can be compared over time and with that of other properties to determine the relative operating efficiency of the property considered. Exit Fees Fees charged by Lenders upon repayment of their loan. They can represent a “penalty” for early loan repayment or may simply represent additional compensation to the Lender for the loan, over and above the interest cost. Fair Market Value (FMV) An economic concept designating the price at which a willing seller and willing buyer will agree when both parties are acting prudently, knowledgeably, and under no compulsion to sell or buy. First Mortgage A lien on property in which the lenders claims are superior to the rights of subsequent lenders. Certain lenders only make first mortgages due to regulatory requirements; others limit mortgages to these senior instruments due to company policy. Fixed Expenses Expenditures such as property taxes, license fees, and property insurance that are not directly affected, by the occupancy of the property. Fixed expenses along with operating expenses are subtracted from effective gross income to determine the net operating income of property. Forward Commitment An agreement between a permanent lender and an interim (typically construction) lender wherein the permanent lender issues a conditional commitment that will replace the construction loan once a given set of terms and conditions have been achieved. Fully Amortized Mortgage Loan A loan that is fully repaid at maturity by periodic (monthly) reductions of the principal. The first part of each monthly payment covers interest on the outstanding debt as of the payment due date and the remainder of the payment goes to reduce the outstanding debt. Good Faith Deposit A deposit made by a borrower with the Lender when signing (executing) a Loan Application. Typically used by the Lender to cover costs associated with Underwriting the loan prior to Committee presentation and approval. Many Lenders will apply the Good Faith Deposit toward a Commitment Fee (if applicable). Sometimes referred to as an Application Fee, but is almost always refundable less actual costs incurred by the Lender if they do not proceed with the transaction. These costs can include the cost of an Appraisal, Environmental Review Report, Structural Engineering Report, Legal Fees, State Document Stamps, Title Fees and other items as needed by the Lender to close the particular loan. Grantee Any person who is given ownership of a piece of property. Grantor Any person who gives away ownership of a piece of property. Gross Lease A lease of a commercial property whereby the landlord (lessor) is responsible for paying all property expenses, such as taxes, insurance, utilities, and repairs. Hard Money Loans First Capital Solutions offers hard money loans for deals with "hair" and LTV's ranging from 50%-70% based on as-is cash sale value. Examples include: land loans, very quick closings; distressed debt or partnership buyouts; bankruptcy loans; borrower background issues; etc. Hedging The purchase or sale of mortgage future contracts by a mortgage banker or lender for the purpose of protecting cash transactions made at a future date. Holdbacks Holdbacks are typically loan proceeds that are “held back” at Loan Closing to be funded at a later date. These proceeds are then funded when the borrower or the property qualifies based upon the terms of the Holdback Agreement. Income Approach A method of appraising property based on the propertys anticipated future income. Once the net income is established, it is then divided by the estimated capitalization rate to arrive at a fair market value. Interest Rate A percentage of a loan or mortgage value that is paid to the lender as compensation for loaning funds. Interim Financing A loan, including a construction loan, used when the property owner is unable or unwilling to arrange permanent financing. Generally arranged for less than 3 years, used to gain time for operations and or market conditions to improve. Index A published interest rate, such as prime rate, LIBOR, T-Bill rate or the 11th District COF. Lenders use indexes to establish interest rates charged o mortgages or to compare investment returns. Ingress and Egress Applied to easements, meaning the right to go in and out over a piece of property but not the right to park on it. Internal Rate of Return IRR The true annual rate of earnings on an investment. Equates the value of cash invested with cash returns. Considers the application of compound interest factors. Requires a trial-and-error method for solution. Joint Venture JV An agreement by two or more individuals or entities to engage in a single project or undertaking. Joint ventures are used in real estate development as a means of raising capital and spreading risk. For all practical purposes a joint venture is similar to a general partnership. However, once the purpose of the joint venture has been accomplished, the entity ceases to exist. Land Acquisition Loan A loan made for the purpose of purchasing land only, not improvements on or to the land. Also called an acquisition loan. Legal Description The description of a piece of property, identifying its specific location in terms established by the municipality or other jurisdiction in which the property resides. Often related in specific distances from a known landmark or intersection. Lender Fees Fees charged by Lenders to cover their costs and overhead associated with making loans. Some Lenders charge fees as additional compensation to supplement profits derived from interest income on the loan. This is particularly true of bridge, mezzanine and equity loans where loan risks can be higher than with permanent loans. Lender Fees take the form of Underwriting Fees, Application Fees, Commitment Fees and Exit Fees. Lease Abstract A detailed recap of office and retail leases including tenant name, suite #, square footage, current rental rate including increases, lease start date, term, CAM requirements, extension options and rates. Leasing Commission (Reserve) The annual cost related to the leasing and releasing of commercial office and retail space. The amount deducted from the Net Operating Income prior to determining the net cash flow available for debt service coverage. Lessee An individual or entity to whom property is rented under a lease. A tenant. Lessor An individual or other entity - one who rents property to another under a lease. A landlord. Letter of Credit An arrangement, with specified conditions, whereby a bank agrees to substitute its credit for a customer's. Leveraged Buy-out The acquisition of a company, financed primarily with borrowed money, using the acquired companys assets to collateralize the loan. LIBOR London Interbank Offered Rate The rate that international banks dealing in Eurodollars charge each other for large loans. Some domestic banks and other lenders use this rate as an index for adjustable rate mortgages. The LIBOR rate quoted in the Wall Street Journal is an average of rate quotes from five major banks. Bank of America, Barclays, Bank of Tokyo, Deutsche Bank and Swiss Bank. Limited Partnership Arrangement in which there is at least one partner whose liability extends beyond monetary investment and at least one partner who is passive and limits liability to the amount invested. Loan Application A non-binding agreement generated by a Lender showing what terms they are prepared to submit to their internal loan committee for approval. When a borrower executes a Loan Application, a cash deposit known as a Good Faith Deposit is usually sent in with the agreement. This Good Faith Deposit helps reimburse the Lender for any out-of-pocket costs associated with the underwriting of the loan. The Loan Application many times converts to the Loan Commitment once the Lender’s internal committee approves the transaction. Loan Application Fee A charge required by a lender or loan originator to be paid by the borrower to cover the credit report, property appraisal and other incidental expenses associated with underwriting the loan. The fee is generally not refundable. Loan Closing The actual process of documenting and funding a loan. This is a complicated process where many legal and due diligence items need to be collected prior to wiring of loan dollars by the Lender. Loan Closing Process The actual process of closing a loan. See Loan Closing. Loan Commitment Once a Lender formally approves a loan through committee, a binding document called a Loan Commitment is generated. This commonly takes the form of either a cover letter making the previously executed Loan Application the Loan Commitment, or the lender issues a new document outlining all details of the loan. This binding agreement is subject to the completion of many items needed for Loan Closing. Loan Constant The quotient of the following formula: Annualized Debt Service (including Amortization) divided by the Gross Loan Amount. Gross Loan Amount is the total loan dollars funded by the Lender. The Constant represents the real annual cash requirement of a particular loan. Loan Marketplace The area within NetFunding.com where loans and transaction progress can be reviewed by Lenders, Borrowers, and Brokers. This helps all parties stay in tune with economic market forces affecting the lending environment. Loan Quote Otherwise known as a hard quote within the NetFunding.com process. A soft quote becomes a hard quote once the Lender has reviewed the Posting Package and enters a Loan Quote. The lender will memorialize this Loan Quote by issuance of a Loan Application. Loan Term Length (in months or years) of a loan. Loan-To-Value Ratio (LTV) The amount of money borrowed compared to the cost or value (appraised or sale price) of the real property purchased. Lock-Box Rental income is delivered to a trustee (or servicer), who then pays expenses and makes the loan payment, before excess cash is released to the borrower. The lock-box removes borrower discretion and control over funds. Locked-in Interest Rate The rate promised by a lender at the time of loan application or commitment. On income property loans, a lock-in generally requires a commitment fee or rate lock fee from the loan applicant. MAI Member, Appraisal Institute Appraisal. A demonstrative narrative report of a specific markets economic condition and an assessment of property value performed by a member of the American Institute of Real Estate Appraisers. The propertys value is derived using three (3) separate methods of valuation including replacement cost approach, sales comparison approach and income approach. Management Fee The amount charged by an independent company for the day-to-day management of a property. Typically based upon a percentage of the propertys income. Market Approach A method of appraising property by analyzing sales prices of similar properties (comparables) recently sold. Market and Feasibility Study A detailed analysis of activities in a market in regard to such influences as location, demand and competition which may or may not affect the value of property. Includes an analysis of a real estate project to determine the most profitable use and the likelihood of the proposed use being a financial success. The study is often used by the promoter or developer to inure would-be investors to participate in the venture and to assist lenders in making their decision whether or not to loan the necessary funds. Market Rent The rental income that a property is likely to command in the under current market conditions. Market rent, also referred to as economic rent, may be either higher or lower than what the property is actually renting for under the terms of a lease. Mezzanine Loan Otherwise known as a junior or subordinate loan. This is a secondary financing traunch that is sandwiched between a senior (first mortgage) loan and the property owner’s equity. Interest rates on mezzanine loans are in the 12-25% range, depending on the reliability of the cash stream from the property. Collateral for the mezzanine loan can be a second mortgage or assignment of the partnership interests. Mixed-Use Commercial Project A real estate development that contains two or more different uses all intended to be harmonious and complementary. An example would include a high-rise building with retail shops on the first two floors, office space on floors three through ten, apartments on the next ten floors, and a restaurant on the top floor. Mortgage-Backed Securities Securities purchased by investors that are secured by mortgages. Such securities are also known as pass-through securities since the debt service paid by the borrower is passed through to the purchaser of the security. Mortgage Banker A financial middleman who, in addition to bringing borrower and lender together, makes loans, packages them, and sells the packages to both primary and secondary investors. Usually the mortgage banker continues to service the loan (collect debt service, pay property taxes, handle delinquent accounts, etc. ) even after the loan has been packaged and sold. For this management service a small percentage of the balance paid to the investor goes to the mortgage banker. Quite often the loan origination fee or finder's fee charged the borrower is more than offset by a lower interest rate from a lender not directly accessible to the borrower. As with mortgage brokers, mortgage bankers are regulated by state laws. Mortgage Broker A person who brings together borrower and a lender and in return is paid a finder's fee. This finder's fee is usually equal to one percent or so of the amount borrowed is normally paid by the borrower. Certain sources of funds, particularly insurance companies, do not always deal directly with the person looking for capital; rather, they work through a mortgage broker. Normally, the mortgage broker is not involved in servicing the loan once it is made and the transaction is closed. Mortgage Constant The relationship between annual mortgage loan requirements and the initial mortgage loan principal, expressed as a decimal or percentage, for level-payment mortgage loans. Used for converting debt service into mortgage loan value. Mortgage Correspondent A person authorized to represent a financial institution in a particular geographic area for the purpose of placing loans. Mortgage Securities Pool A method by which securities backed by the value of specific real estate mortgages are issued in the financial market for investment purposes. Such securities, because they are mortgage-backed, are more marketable and generally are issued with a lower rate of interest than if no such backing existed. Net Leasable Area In a building, the floor space that may be rented to tenants or the area upon which rental payments are based. Generally excludes common areas and space devoted to the heating, cooling, and other equipment of a building. Net Lease A lease whereby, in addition to the rent stipulates that the lessee (tenant) pays such expenses as taxes, insurance, and maintenance. The landlord's rent receipt is thereby "net" of those expenses. Net Operating Income NOI Income from property after all operating expenses and reserves have been deducted, except for income taxes and financing expenses (interest and principal payments). Non-conforming Use A use that violates zoning regulations or codes but is allowed to continue because it began before the zoning restriction was enacted. Non-recourse Loan No personal liability of the Borrower. Upon default, a Lender may take the property pledged as collateral to satisfy a debt, but have no recourse to other assets of the borrower. Occupancy Rate The ratio of the space rented to the total amount of space available for rent. A 50-unit apartment complex in which 40 units are currently rented has an occupancy rate of 80 percent (40 divided by 50). On-The-Run vs Off-The-Run The on-the-run treasury is the most recently issued treasury in a particular sector. Currently the government issues 2yr, 3yr, 5yr, 10yr, and 30yr treasuries. These are the only maturities where there are on-the-runs. 5yr treasuries, for example, are issued at the end of every month, so every month there is a new on-the-run 5yr. 10yrs are issued quarterly in February, May, August, and November. The current on-the-run 10yr is November 2009; in February it will become the February 2010 and the November will then be off-the-run. On-the-run treasuries always trade at lower yields because there is increased demand for them because they are the benchmarks. Operating Expenses Periodic expenses (usually monthly) of operating income-producing property other than debt service and income taxes. Operating expenses are those directly related to the level of occupancy and usage of the building. These can include management fees, maintenance, ground maintenance, utilities, supplies, legal fees, accounting fees, and other such costs. These expenses are subtracted from gross income to equal the net operating income. Operations and Maintenance Plan O&M A written plan detailing the removal of potentially environmental sensitive materials. Origination Fee The amount charged by a lender to cover the time and expenses incurred in arranging a loan. This fee covers such expenses as credit checks, and appraisal of the property. Normally the origination fee is stated as a percentage of the loan amount; for example, one percent. Participating Debt For land development or repositioning projects First Capital Solutions offers a Participating Debt program whereby the company will lend into the 90's on the capital stack for a profit participation or percentage of sales. Permanent Financing A mortgage loan, usually covering development costs, interim loans, construction loans, financing expenses and marketing, administration, legal and other costs. This loan differs from the construction loan in that financing goes into place after the project is constructed and open for occupancy. It is a long-term obligation, generally for a period of 10 years or more. Phase I Environmental Report A comprehensive report required by most Lenders and produced by an independent company that details the current environmental condition of a property. Typically requires a historical review of the property’s previous uses and may require a operations and maintenance (O&M) plan for the future removal of asbestos and other harmful items. Physical Condition Report A comprehensive report required by most Lenders and produced by an independent company that details the current physical condition of a property. Typically includes specific items that require immediate repair as well as those items that should be replaced over the life of the loan. Basis used to establish the annual Replacement Reserve Escrow for the property. Potential Gross Income The amount of income that could be potentially be produced by a real estate property assuming there are no vacancies or collection losses. Does not include miscellaneous or other income. Pricing Matrix Many lenders initially quote transactions based upon a matrix. This matrix is organized by property type, LTV and DSCR. Depending on the risk profile of the particular transaction (from the matrix) a Lender can quickly quote a rate spread. Underwriting will adjust this pricing up or down depending on detailed transaction analysis. Prime Rate The lowest commercial interest rate charged by banks on short-term loans to their most credit-worthy customers. The prime rate is not the same as the long-term mortgage rate, though it may influence long-term rates. Mortgage rates are generally higher than the prime rate, but exceptions occur at times. Pro-forma A financial or accounting statement using estimates and assumptions to project income and the performance of real property over a period of time. Principal & Interest Payments P&I A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to amortization of the principal balance. Commonly used with amortizing loans. Quitclaim Deed A form of deed which conveys only the present interest a person or entity may have in a particular property without making any representations or warranties of title. Such a deed is useful in clearing up doubtful claims such as possible disputed liens. Real Estate Land and everything more or less attached to it. Ownership below to the center of the earth and above to the heavens. Real Estate Investment Trust REIT A real estate mutual fund, established by income tax laws to avoid the corporate income tax. It sells shares of ownership and must invest in real estate or mortgages. It must meet certain other requirements, including minimum number of shareholders, widely dispersed ownership, and certain asset and income tests. Real Estate Market The potential buyers and sellers of real property at the current time. It includes markets for various property types, such as office market, housing market, land market and condominium market. Recourse The ability of a lender to recover money from a borrower in default, in addition to the property pledged as collateral. Rehabilitation Tax Credit The Tax Reform Act of 1986 provides a 20% tax credit for rehabilitating certified historic structures, and a 10% credit for other buildings that were placed in service after 1936. Replacement Reserve Various account(s) maintained (typically by the Lender) to provide funds for anticipated expenditures required to maintain a building. A reserve account usually is required by a lender in the form of an escrow to pay upcoming taxes and insurance costs. A replacement reserve may be maintained to provide for replacement cost of short-lived components, such as carpets, heating equipment or roofing. Also, a tenant improvement and leasing commission account may be required for future changes in tenancy. Reserves Proceeds generated by a property that are set aside to pay for future events. These future events can include property repairs and replacements, and costs associated with new tenant, such as space improvements/leasing commissions etc. Reserve funds can also be set aside to build additional collateral for a loan. Reserves are many times collected by the lender to make sure funds are available to pay these future costs whether real or imagined. Revenues The total amount of money a company receives for sales of goods and services during a particular accounting period. REVPAR Revenue per Room Calculation is in underwriting (usually hotels) where the gross income is divided by the total number of rooms available (both occupied and unoccupied). Sales Comparison Approach A method of estimating the value of real property by comparing recent sales of comparable properties to the subject property after making appropriate adjustments for any differences. The comparable properties chosen should be substantially similar to the subject property and should be arms-length transactions. Secondary Mortgage Market The means by which existing first mortgages are bought and sold. The secondary mortgage market provides a lender with an opportunity to sell a loan before its maturity date, thereby providing greater availability of funds for additional mortgage lending. Self-Amortizing Loan A mortgage loan that requires level annual payments sufficient to meet the interest requirements and fully repay the entire principal over its term. Servicing Fee The periodic (monthly or annual) payment made by the purchaser of a mortgage (Lender) to the mortgage banker (correspondent) who originally made the loan for servicing the loan. The fee, which varies from one-eight to one-half percent of the outstanding loan balance, covers the administrative costs of servicing such as collection and payment of property taxes and property insurance premiums. Servicing rights may be bought and sold along with the loan. Soft Quote A preliminary non-binding loan proposal made by a Lender based upon incomplete transaction data. The Soft Quote terms can change for the better or worse depending on the Lender's underwriting once detailed transaction information is submitted. Spread The difference between the rate at which money can be borrowed and the rate at which it is loaned. Typically the rate (percentage amount) that is added to the Treasury Bill by a Lender when quoting a rate to a borrower. Stabilized Term associated with the operation of a property wherein the income and expenses have achieved and maintained a consistent level of performance. The minimum is usually established when the property has performed at specific minimum for ninety (90) days. Subordinated Ground Lease A land (ground) lease in which the rent payment due from the lessee (borrower) to the lessor (land owner) is subordinated to the debt service owed by the lessee (borrower) to the mortgagee (lender). Normally, a ground lease contains a subordination clause because without it, construction of improvements may be more difficult. A mortgage lender will consider the full value of the property only with a subordinated ground lease. Survey The process by which the precise physical boundaries of a parcel of land are measured. Legal descriptions appear in title reports, sales contracts, deeds, mortgages, notes, and other instruments involving rights and interests in real estate. When land is conveyed from one party to another, the survey provides a visual representation of the legal description. Take-out Commitment A written agreement from a Lender to provide permanent financing following construction of a planned project. The takeout commitment usually contains specific conditions for occupancy and income, such as a certificate of occupancy and/or a certain percentage of unit sales or leases in place and paying rent. Most construction lenders require takeout financing prior to beginning construction. Tax and Insurance (Reserve) Escrow An account required by a mortgage lender and established at the time of closing to fund annual property tax assessments and hazard insurance premiums for the mortgaged property. Funded through monthly contributions and maintained by the Lender. Tenant Improvement (Reserve) Escrow An account required by a mortgage lender and established at the time of closing for the purpose of reserving funds estimated to be necessary to improve retail and office space. Funded through monthly contributions and maintained by the Lender. Third Party Reports Reports required by a mortgage lender prior to funding a loan that include MAI Appraisal, Phase I Environmental and Physical Condition reports. Title Insurance An insurance policy that protects the holder from loss sustained by defects in the title. Triple-Net Lease A commercial lease in which the tenant is required to pay all operating expenses of the property and the landlord receives a net rent amount each month. Trust Deed A conveyance of real estate to a third party to be held for the benefit of another. Commonly used in some states in place of mortgages that conditionally convey title to the lender. Underwriter An employee of a mortgage banking company or lending institution, who reviews a loan application, verifies all information is accurate and makes a recommendation to a loan committee as to the desirability and risk of making the loan. The underwriting process is an critical part of the overall lending process. Underwriting Criteria In mortgage banking, the analysis of the risk involved in making a mortgage loan to determine whether the risk is acceptable to the lender. Underwriting involves the evaluation of the property as outlined in the appraisal report and of the borrower’s ability and willingness to repay the loan. Underwriting Fee Some Lenders charge a nominal non-refundable fee to Underwrite a Loan. This Fee is used to offset costs associated with Underwriting a Loan. These Underwriting Fees are common with Securitized (Conduit) Lenders. U. S. Treasuries Only treasuries with an original term of 30 years are Bonds. All treasuries with original terms of 2-10 years are Notes. Everything shorter than two years are Bills. Vacancy Rate The percentage of all units or space that is unoccupied, not rented or from which there is no rental income. On a pro-forma income statement a projected vacancy rate is used to estimate the vacancy allowance (both physical and economic), which is deducted from potential gross income to derive effective gross income. Warehousing The process by which a mortgage banker assembles mortgages that they have made and prepares the mortgages to be sold in the secondary mortgage market. By selling these mortgages the originator now has additional capital that can be used to make more mortgages which in turn may also be sold in the secondary mortgage market. Wraparound Mortgage A method of acquiring additional financing on real estate by placing the additional funds in a secondary or junior position to the existing debt. As its name implies, a wraparound mortgage 'wraps around' an existing first mortgage plus the amount of the new secondary or junior lien. This method of obtaining additional capital is often used with commercial property where there is substantial equity in the property and where the existing first mortgage has an attractive low interest rate. By obtaining a wraparound, the borrower receives dollars based on the difference between current market value of the property and the outstanding balance on the first mortgage. Thus, the borrower reduces the equity and at the same time obtains an interest rate lower than would be possible through a normal second mortgage. The lender receives the leverage resulting from an interest rate on the wraparound greater than the interest paid to the holder of the first mortgage. Yield Maintenance The prepayment premium which will equal the present day value of any costs to the lender resulting from the difference in interest rates between the date of the note and the date on which the prepayment is made. In other words, the borrower must pay the lender enough money so that the lender can theoretically replace the loan’s future cash flows using Treasury Securities. Zoning Ordinance The act of city or county or other authorities specifying the type of use to which property may be put in specific areas. The act of city or county or other authorities specifying the type of use to which property may be put in specific areas. |
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