Mortgage Banking

Making sense of commercial real estate finance.

Commercial Real Estate Terms

Anchored Retail A shopping center with at least one major grocery, discount retailer or department store. Typically has more customer traffic due to the anchor store.

Basis Point (bps) One hundredth of one percent; 100 bps equals 1%

Capital Expenditures (Cap Ex) One time building maintenance expenses such as roofing, paving/striping parking lot, or replacing HVAC.

Capitalization Rate The ratio of cash flow (NOI) divided by the value of a property.

CDO (Collateralized Debt Obligation) Similar to a CMBS but includes mortgages, bonds and other securities..

Class A Properties Trophy quality properties with quality finishes and prominent locations.

Class B Properties Well maintained real estate in average locations with few amenities.

Class C Properties Older properties needing renovation.

CMBS (Commercial Mortgage Backed Securities) A bond that is made up of several mortgages on commercial real estate; typicaly split into several tranches. (read a simplified explanation of a CMBS here)

Comparables (Comps) Report showing similar properties (price, location, sale date, etc.) that justify current price of a property. Also can be done with leases.

Debt Service Annual loan payments

Debt Service Coverage Ratio (DSCR) The ratio of Net Income over Annual Debt Service. It determines the ability to meet and exceed annual debt payments. (Here’s a post explaining DSCR)

Defeasance A method of prepaying a loan (usually a CMBS loan) that effectively replaces the borrower’s loan payments with a government security with the same yield. Typically, a defeasance is a more costly method of prepayment.

Fee Simple Ownership of both land and building in perpetuity.

FF&E Furniture, Fixtures, and Equipment; Used in underwriting hotels.

Flex Space/Office Warehouse An industrial building with a higher percentage of office space than a typical industrial building.

Full Service Hotel A hotel that offers banquet/convention facilities, at least one restaurant and usually a pool.

Garden Apartments Multiple 2-3 storey apartment buildings grouped together, usually in suburban areas.

Ground Lease Building owner leases land from land owner.

High Rise Apartments Over three stories; usually located in downtown areas.

Interest Only A loan where no principal is paid down resulting in a lower loan payment. Very popular for the last few years, lenders are now more hesitant to use.

LTV See Loan to Value.

Leasing Commissions Fees paid by landlords to brokers to find tenants for vacant space.

Limited Service Hotel A hotel with no restaurant and not much meeting space.

Loan to Value (LTV) The ratio of Loan Amount over Appraised Value. Typically anything under 60-65% LTV is considered a low loan to value, and should get better pricing.

Lockout A period during which the borrower is prohibited from prepaying the loan.

Material Adverse Change (MAC Clause) Gives the lender the right to terminate or renegotiate the loan prior to closing, if there is a major change in the market that will hurt the lender. Examples are the recent sub-prime meltdown, the 1998 Russian Ruble Crisis, or the 9/11 terrorist attack.

MAI (Member, Appraisal Institute) Certification given to appraisers; most lenders require an MAI appraiser.

Mezzanine Debt Similar to a second mortgage in residential real estate, it is debt secured by borrower’s equity in the property. Used in combination with a senior mortgage to get a higher all in LTV.

NOI (Net Operating Income) Property revenues minus property expenses, excluding debt service, depreciation and capital expenditures.

Non-Recourse A loan that is only secured by the property. If the owner defaults, the lender can only take back the property. (see recourse)

Occupancy Rate A percentage of the number of occupied units over the total number of units.

Prepayment Penalty A fee to payoff a loan prior to the maturity date. Typically, the closer to the maturity date, the lower the fee. Examples are defeasance and yield maintenance.

Recourse A loan that is secured by the property and the owner’s personal liability. If the owner defaults, the lender will take back the property as well as personal property to repay the loan. (see non-recourse)

REO (Real Estate Owned) A foreclosed property currently owned by a lender.

Rollover Used to describe the expiration of a tenant lease.

Senior Mortgage A first mortgage on a property.

Shadow Anchored Retail Similar to an anchored retail except that the property is adjacent to an anchor store.

Strip Retail (In Line) Usually 3 or 4 smaller retail stores connected together.

Tenants In Commons (TIC) A type of property ownership made up of several tenants; often used in 1031 exchanges.

Tenant Improvements (T.I.’s) The cost to build walls, ceilings, carpet for a new office tenant. Occasionally occurs at other property types as well. The landlord usually incurs this expense.

Tranche A slice (portion) of a CMBS bond with a specific risk rating, ie AAA or BBB

Triple Net Lease A type of lease where the tenant pays all of landlord’s expenses.

Unanchored Retail No major anchor tenant in property or nearby.

WAL (Weighted Average Life) The average number of years until all mortgage principal is expected to be paid off.

Yield Maintenance A prepayment penalty that requires a borrower to pay a lump sum equal to the outstanding interest payments of a loan. Each lender calculates this differently; it be anywhere from 0 to 6% of the loan amount.

 

If you have a question about any of the above or if there is something I haven’t listed, please contact me.

 
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