Philip Baskaron

Broker

 COMMERCIAL GLOSSARY

Acre Definition

An acre is a unit to measure land.

1 acre = 43,560 sq. ft = 4,840 sq. yds. = 160 sq. rods

If there is a square parcel of land, that measures 208.71 ft. on each side, then that parcel contains one acre.

There are 640 acres in a ?section? of land.

It is common to see acreage on raw land as opposed to buildings.


Amortization For Commercial Loans

Amortization (also shortened to "am") is the period of time over which principal and interest payments are scheduled for payment (usually in years).

For example, a loan with a 10 year term and a 25 year am. will have a balloon payment at the end of 10 years, with calculated payments based on 25 years.

Also, the maximum number of periodic installments (expressed in years) over which repayment of a mortgage debt is calculated. A portion of each payment consists of a blend of interest and principal.

EXAMPLE

Let's assume you have a loan for $1,000,000 at a 10% interest rate with 25 year amortization and a balloon payment due in 10 years. This is what you would have:

  • Present Value: $1,000,000
  • Interest Rate: 10%
  • Term: 25 years
  • Payment: $9,087.01
  • Balloon Amount: $845,613.64
  • Interest Amount: $936,054.54
  • Total Amount: $1,936,054.54


Application Fee Definition

An application fee or schedule of fees charged by a lender at the time of loan application. This fee may include the cost of an appraisal, credit report, processing fee or other closing costs which are incurred during the process or the fee may be in addition to other charges.

These fees should be outlined in the LOI from the lender. They may or may not include the Commercial Mortgage Broker fee.


Appraisal Definition

An appraisal is an estimate of the value of a property, made by a qualified professional called an appraiser. They will determine what is the estimated market value of the property.

To reduce the risk of fraud, most lenders select and order their own appraisers. However, if you choose to hire one to determine the value of your property, make sure that they meet certain standards.

They should be qualified with commercial properties, have significant education and experience. The best way to determine this is to see if they have a MAI designation from the Appraisal Institute (a professional organization of real estate appraisers).

An appraisal is usually good for 6 months.


Assumption Fee Gives You Options

Assumption fee or the ability to assume a loan should be included in any commercial loan that you are considering. It is a fee, paid by a borrower or lender, for the paperwork and processing of records necessary to approve and document a new borrower.

In residential investing, most lenders will not allow new borrowers to take over an existing loan and can legally call the loan due if it is (also called taking the loan "Subject To").

But in commercial loans this is not true. Most loans can be taken over by a new borrower for a small fee, usually 2%.

So why is this important to you?

Because when you decide to sell your property, this option will give you a larger pool of potential buyers to choose from. When looking at commercial loans, make sure your loan has this option.


Blanket Loan Definition

Blanket loan refers to a mortgage that covers more than one parcel of real estate owned by the mortgagor.

When purchasing a portfolio of properties, it is possible to have one loan that covers the entire portfolio.


Bridge Loan Definition

A bridge loan is short term mortgage financing that is in place between the termination of one loan and the beginning of another loan.

Also, a form of interim loan, generally made between a short term loan and a permanent (long term) loan, when the borrower needs to have more time before taking the long term financing.

Commonly used for construction or rehab. Because the financing is short term, the rates are higher than a conventional loan.

 

BSPRA

BSPRA stands for Builders and Sponsors Profit and Risk Allowance. You will find this term with government sponsored loan programs such as Sec. 221(d) loans for apartment construction.

The builder?s (or sponsor) profit is built into the loan. This allowance is equal to 10% of all costs other than land. This allowance allows for a reduction in the amount of cash needed.

An example of how this works is:

Total Development Costs = $5,845,000

BSPRA = $584,500

Land Value = $650,000

Total Costs = $7,079,500

Construction Loan at 90% Costs = $6,371,550

This is one reason why this particular apartment construction loan program is so attractive.

 

CAM Expense Definition

A CAM expense (also called Common Area Maintenance expense), is the operational expenses related to the utilities and maintenance of retail and office properties.

Under a Triple-Net lease, the tenant will reimburse the landlord/owner for their proportionate amount (based on square footage) of this expense.

As an owner of a multi-tenant retail/office property, your CAM expenses can be high and must be managed carefully. A good property management company will handle these details for you.


Capital Expense Definition

Capital expense are expenses that include capital expenditures required to maintain a building and future capital improvements of major building systems (e.g. HVAC, parking lot, carpets, roof, etc).

Replacement reserves are typically calculated on a per unit basis (e.g. multi-family ? per unit; office, retail, industrial ? per square foot).

CAP Rate Definition

The CAP rate (also known as the capitalization rate) is the rate of return on net operating income considered acceptable for an investor and used to determine the capitalized value. It is the ratio of the annual NOI (net operating income) to the property price (or value).

Value = annual income divided by the capitalization rate (V=I/R)

Commercial realtors and property owners often quote "market" cap rates. You should not base your investment decision on market cap rates. It should be based on your personal cap rate (what is the return that you want and/or expect.

Class A Property Definition

A Class A property classification is for properties that are above average in terms of design, construction and finish. They usually command the highest rental rates in an area and have a superior location, in terms of desirability and/or accessibility.

Class A properties are generally professionally managed by national or large regional management companies.

Class B Property Definition

A Class B property classification is for properties that frequently do not possess design and finish reflective of current standards and preferences (modern, up to date).

The construction is adequate and generally command average rental rates. The unit sizes are usually larger than Class C properties.

They are typically well maintained by national or regional management companies.

Class C Property Definition

A Class C property is a property classification for properties that provide adequate functionality and show some level of deferred maintenance or upkeep.

They usually have below market rental rates and located in less desirable areas.

They tend to be managed by the owners or a small, local property management company.

The tenants provide a less stable income stream to property owners than Class A and B tenants.

 

CMBS Definition

CMBS (Commercial Mortgage Backed Securities) are backed by loans secured with commercial rather than residential property. The Commercial Mortgage Backed Security market provides liquidity and diversification to commercial real estate investors and ready access to capital for commercial lenders. For more information, visit the Commercial Mortgage Securities Association.

This is important to understand because many lenders underwrite their loans to these guidelines. If their loans don't conform to the industry, then they can't be sold on the open market.

So if you're wondering why your local bank can't give you 100% loan on your office building in downtown Chicago, is because the bank won't be able to sell that loan on the open market! If you undertsand what the lenders' needs are, you will be better equipped to get loans for your commercial properties.

 

Conduit Definition

The financial intermediary that sponsors the conduit between the lender(s) originating loans and the ultimate investor. The conduit makes or purchases loans from 3rd party correspondents under standardized terms, underwriting and documentation. Then, when sufficient volume has been obtained, the conduit pools the loans for sale to investors in the CMBS market.

 

Construction Loan Definition

Construction loan is a short term loan to pay for the construction of commercial buildings. These loans typically provide periodic disbursements to the builder as each stage of the building is completed. When construction is completed a take-out or permanent loan is used to pay off the construction loan.

Credit Rated Definition

Credit rated identifies whether the tenant is an investment grade tenant with a BBB- rating or higher (as rated by Standard & Poor's ).

So why is this important to know?

The credit of your tenant makes all the difference in commercial financing. The credit worthiness of the tenant as well as the lease terms is seen as a safe "risk" for a lender, so therefore, they are willing to lend on good terms.

For instance, I have a lender that loves lending to the developers of single, credit tenant buildings. This lender will loan the developer 100% of the acquisition and construction costs, secured by the leases.

There is also attractive financing available to the purchasers of these types of properties. They can also get 100% financing with DSCRs as low as 1.00x. Again secured by the lease.

 

DSCR Definition

DSCR or Debt Service Coverage Ratio is a ratio that determines a mortgaged property?s ability to cover monthly payments. It is calculated by taking the NOI (annual net operating income) and dividing it by the annual mortgage payments.

Debt Service Coverage Ratio = NOI / mortgage payments

A ratio of less than 1.0 means that there is not enough cash flow to cover required debt payments. Most lenders like to see a debt service coverage ratio of at least 1.20 and higher. From the lender's viewpoint, they want to make sure that the income generated from the property can pay for the loan.

Different commercial property types have different debt service coverage ratio requirements. When talking to your Commercial Mortgage Broker or Commercial Lender, ask them what their requirements are for the property you are considering buying. This will help you determine how much you can offer to pay for the property; not necessarily what it is listed for! Remember...everything in real estate is negotiable!

 

Fannie Mae Definition

Fannie Mae (Federal National Mortgage Association, FNMA) is the largest buyer of existing mortgages. The FNMA was originally organized by the federal government in 1938 to purchase FHA-insured mortgages. The association was reorganized in 1968 as a quasi-private corporation whose entire ownership is private.

Fannie Mae raises capital by issuing corporate stock which is actively traded on the New York Stock Exchange and by selling mortgages out of its portfolio to various investors.

 

FNMA Financing Definition

FNMA/DUS financing is a loan program through a lender designated by Fannie Mae who originates, underwrites, closes, and services Fannie Mae approved multifamily mortgage loans.

Freddie Mac Definition

Freddie Mac is also known as the Federal Home Loan Mortgage Corporation. This corporation is owned by stockholders and it was created by Congress in 1970 to help keep a steady supply of funds to mortgage lenders.

Mortgage lenders provide loans to support homeownership and rental housing. In turn, Freddie Mac purchases the mortgage notes from the lenders and re-packages them into securities that are sold on the open market to investors.

Free Standing Retail Definition

Free standing retail is a retail property where there is only one tenant.

Examples would be fast food restaurants (like a McDonald?s) or a heavy traffic retail stores (like a Home Depot). These stores are also known as ?big box? stores.

A free standing retail store usually measures from 2,000 to 100,000 sq. ft. in gross building area.

 

Full Service Lease Definition

Full Service Lease is also known as a Gross Lease. This is a type of lease, where the property owner/landlord is responsible for all building expenses.

This type of lease is more favorable to the tenant.

 

Ginnie Mae Definition

Ginnie Mae is the informal name for the Government National Mortgage Association (GNMA). GNMA is part of the Dept. of Housing & Urban Development (HUD) and is completely owned by the United States Government.

Ginnie Mae buys home mortgage notes from lenders and resells them to investors. The securities are insured and guaranteed by the U.S. government.

 

Gross Building Area Definition

Gross building area is the total building area (square feet) in an office building that is associated with the building?s use. The areas that are usually excluded are any common areas, such as roof space, elevators, hallways, stairways, etc.

This is usually the area that is used as leased space (income). When you are looking to buy a property, it will list the gross building area.

Gross Leasable Area Definition

Gross leasable area is the total area (square feet) that is used for rental space in a building.

 

Gross Reimbursement Structure Definition

Gross Reimbursement Structure is a type of lease where the lessor (or landlord) has to pay all costs for maintaining the property. The opposite of net lease, where the tenant is responsible for these costs.

As a potential property owner, it is important to account for these expenses when determining the value of a commercial property. Reading and understanding your leases is a task that often gets overlooked by new investors.

 

Ground Lease Definition

A ground lease is a type of lease that is on raw (undeveloped) land or a type of lease that covers the land but not any improvements (usually a net lease).

Ground leases may be subordinated or unsubordinated

Subordinated ground lease is when the lessor of the ground is junior to the rights of the holder of the first mortgage.

Unsubordinated ground lease is when the lessor of the ground is senior to the rights of the holder of the first mortgage.

 

Hard Money Loan Definition

Hard money loans are loans where the real estate is used as the collateral.

The lender assumes a lien on the property and if the borrower can't repay the loan, the lender can take the property. The lender will then sell the property to satisfy the loan.

The reason why these loans are Hard is because with these types of loans, interest rates are higher and the LTVs (loan-to-value ratios) are lower. They are considered riskier to the lenders and the lender is not secured/guaranteed by a government institution (unlike mortgages given by banks).

These loans are usually short term and are used as a type of bridge loan. As with other collateralized loans, the size, rate, and length of the loan are determined by the borrower?s equity in the asset, the volatility of the asset and marketplace, and the financial standing of the borrower.

 

Index Yield Definition

The index yield corresponds with a published interest rate, such as the Prime Rate, LIBOR (London Inter-bank Offered Rate), Treasury Bill/Treasury Note rate, 11th District COFI (Cost of Funds Index), etc.

Lenders use these to establish interest rates charged on loans or to compare investment returns. A final loan rate typically includes an Index Yield plus a spread. If you know the basis of what your lender uses, you can always have a good idea of what your interest rate will be. For example, if your lender typically charges 2 points over prime, then if the prime rate is 6%, your loan rate would be 8%.

 

Lease Assignment Definition

A lease assignment is an arrangement between the property owner and the lender, where the lease payments are sent directly to the lender. Otherwise, the lease payments would be sent to the property owner who would then send the payment to the lender or servicer.

 

Lease Option

Lease options in the lease indicate if there are any lease renewal options included in the agreement. A lease renewal option will let the tenant extend the lease for one or more prescribed time periods.

Renewal options are binding on the lessor/landlord, but allows the tenant a choice in regards to renewing the lease.

 

LIHTC

LIHTC or low income housing tax credit is a federal program. This program is defined by the Internal Revenue Code (Section 42) and was enacted by Congress in 1986. The purpose of this program is to help provide affordable rental housing to low income families by giving developers tax credits. The low income housing tax credit provides a credit against future tax liabilities or a reduction in the amount of liability, on a dollar for dollar basis. The developers can either use the credits themselves or they can sell them to raise capital for their projects.

This program is the best resource that developers have to raise equity for projects that wouldn't otherwise work. Otherwise, if developers have to raise the capital without the tax credits, then the cost of borrowing the capital would be high. Then the rents would have to be higher to justify the project.

 

LOI Definition

A LOI is also known as Letter of Interest or Letter of Intent. It is a legal document stating that a prospective developer, buyer or lessee is interested in a property. It usually states terms/prices but does not create any legal or binding obligation.

A formal contract will come after a LOI if both parties agree to the terms in the LOI.

Loan Assumption Definition

Loan assumption is the act of assuming the previous borrower?s obligation of a loan. Assumptions can be worthwhile if the terms of the loan are beneficial to the new owner and if the lender does not change the terms when the loan is assumed.

Lender's that allow assumptions usually charge a small fee to handle the administrative costs (around 2%).

 

LTV Definition

LTV is also known as the Loan To Value. It is the percentage between the principal amount of the loan balance, to the current value of the underlying property.

Frequently, lenders will advertise what LTV (their risk) that they are willing to loan on.

How to calculate the LTV of a property?

LTV = (loan amount / property value) * 100

As an example, let's assume you want a loan for $1,000,000 and the property is worth $1,200,000. Your LTV is:

($1,000,000 / $1,200,000) * 100 = 83.3% LTV

 

Net Cash Flow Definition

The Net Cash Flow for a property is calculated by taking the total income minus all expenses, adjustments, capital expenditures, tenant improvements and leasing commissions. This does not include mortgage payments.

 

NOI Definition

The NOI (or Net Operating Income) is the total income minus operating expenses (or adjustments), but before mortgage payments, interest, tenant improvements and leasing commissions.

NOI = Total Income - Operating Expenses

Determining the NOI is where your due diligence comes into play. Always verify the numbers presented to you from the owner and make certain to determine NOI based on how YOU would operate the property. Evaluating the expenses may be a little tricky because you will have to get it verified from third parties but you want to find out about it before you close!

 

NN Lease, Double-Net or Net-Net Lease Definition

NN lease is a type of lease that usually requires the tenant/lessee to pay for property taxes and insurance in addition to the rent. The owner/lessor will pay for maintenance (roof & structural).

This type of lease is not as desirable as a triple net lease for the owner. Why? Because it involves the owner in some of the management details & expenses. With a triple net lease, the tenant is responsible for all expenses, taxes and insurance. As an owner, you want most, if not all of your expenses "net" out of the lease.

The forms of net leases are: N, NN, NNN, and NNN Bond lease.

The only way to know exactly what expenses you are responsible for, is to read the leases carefully before you buy the property.

 

NNN Lease or Net-Net-Net (Triple Net) Lease Definition

In an Absolute NNN lease, the tenant pays for property taxes, insurance and maintenance in addition to the rent.

Most triple net properties are for a single tenant and are long term (5 yrs or more).

This is considered a very desirable investment because the owner basically has no management or maintenance issues; they are the responsibility of the tenant. These items are negotiable, so read the leases carefully. Even though a property may be advertised as a triple net, until you read the lease you will not know.

Some well known companies that are usually triple net are Walgreen's and CVS pharmacies.

 

Non-Recourse Definition

Non-recourse is a type of loan where the lender will not pursue the borrower, personally in case of default. The lender?s only remedy is the property being financed or the property being used as collateral.

However, non-recourse loans usually have clauses (also known as carve outs) in them that would convert the loan into a recourse loan. These standard carve outs include fraud and misrepresentation.

This type of loan is desirable for most commercial borrowers because they won't have to personally guarantee the loan (which means it won't show up on their credit report).

Why is this important?

Because you aren't limited to the number of properties you can own. In the residential market, investors can't obtain anymore loans if they have a certain amount of loans (normally around 10 loans) already in their name.

 

REIT Or Real Estate Investment Trust Definition

A REIT is a business entity formed to invest in real estate, mortgages and/or securities backed by real estate.

Real Estate Investment Trusts are required to pass through 95% of taxable income to their investors and are not taxed at the corporate level. The three major types are equity, mortgage and hybrid.

Real Estate Investment Trusts tend to specialize in property types. For instance, there are Real Estate Investment Trusts that specilize in Apartments, Offices, Hotel's, Retail stores, etc.

Real Estate Investment Trusts can either be public traded or private.

To learn more about Real Estate Investment Trusts, visit National Association of Real Estate Investment Trusts website.

 

Recourse Loans

Recourse is a type of loan in which if the borrower defaults, the lender?s remedies can include the property as well as the borrower?s personal assets.

Recourse loans are more prevalent on apartment loans, construction loans or any loans where the lender is taking on a lot of risk.

 

Retail Outparcel Release

A retail outparcel release is a provision that you can work into your loan documents. To begin, lets define what an outparcel is.

An outparcel is a piece of property/land that is located near a major store, plaza or mall (but not physically attached to it).

For example, most Super Wal-Mart's are surrounded by other stores that are not physically attached to it. These are outparcels.

Now lets define what an outparcel release is!

You are the owner of a retail development site and you used the entire development as collateral for your CMBS loan. The terms for a CMBS loan are pretty much written in stone and are very difficult to change after the loan has closed. Why would you want to change the mortgage committment?

You currently have a major anchor and the outparcel's are all leased out. Then one of the outparcels becomes vacant and you can't get it leased. If you could renovate the outparcel to accomodate a new tenant you could get it leased quickly. But if you didn't pre-plan for this scenario and had a partial release of the retail outparcel site written into your loan, then you are stuck because most loans have limitations built into them, which limits any changes to the property.

So if the loan is structured on the front end to allow for construction (doesn't mean that you have to do construction but gives you the option in the future if you think it is needed) changes, then this would allow you to renovate the outparcel to accommodate new tenants, without having to re-work the loan.

 

Single Tenant Investment Grade Definition

Single tenant investment grade is a retail property where the property is net leased to one investment grade tenant (BBB- rating or higher). An example would be a Walgreens, Home Depot or CVS stores.

With investment grade tenants, you will be able to get better financing terms with lenders. The credit worthiness and financial strength of the tenant holds more weight than you as the borrower, with the lenders.

To verify the credit of your tenant, look at Standard & Poors.

 

Single Tenant Non-Investment Grade Definition

A single tenant non-investment grade, is a retail property where the property is net leased to one tenant that has a credit rating of BBB- or lower.

Why is this important?

The credit of the tenant is more important to a lender than the borrower! If the tenant's credit isn't stellar, lenders will charge higher rates and offer lower LTV's to borrowers.

When considering commercial property, not only is it important to verify the lease but you must also verify the credit of the tenants. And just because a company is well-known, don't automatically assume that they have good credit! To check the investment status of tenant, use Standard & Poor's.

 

S&P

The S&P or Standard & Poors is one of the four primary rating agencies.

It is currently owned by McGraw-Hill and can be found at its website.