Glossary

• Adjustable Rate Mortgage: Mortgage where the interest rate adjusts periodically up or down through a set index. Also called a floating rate mortgage.
• Adjusted Gross Income: Gross income of a building if fully rented, less an allowance for estimated vacancies.
• Adjustment Interval: The period of time between changes in the interest rate for an adjustable-rate mortgage. Typical adjustment intervals are one year, three and five years.
• Annual Percentage Rate (APR): This is the actual rate of interest your loan would be if you included all of the other associated costs such as closing costs and points.
• Apartment Conversion: When a rental apartment building is converted to individually owned units.
• Apartment Rehabilitation: Extensive remodeling of an older apartment building.
• Assumable Loans: Loans that can be transferred to a new owner if a home is sold.

• Balloon (Payment) Mortgage: Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining principal balance, due at a time specified in the contract.
• Basis Points (BP): 1/100th of 1% expressed as margin over index rate.
• BC & D Lender or Loan: The term BC & D is a rating of the loan. We refer to BC & D as “problem or troubled” credit rather than using these letters.
• Buydown: The process of paying additional points on the loan to reduce the monthly mortgage. There are typically two specific types: a Permanent Buydown, and a Temporary Buydown. In a Permanent Buydown, a sufficient amount of interest is prepaid to lower the rate permanently. In a Temporary Buydown, only a sufficient interest is paid to lower the payment for the first three years. The reason to Temporarily Buydown, a loan is to lower the current payments thereby more easily qualifying for the loan. This usually makes sense because income will usually continue to increase as the interest does. The most common Temporary Buydown is called 3-2-1, meaning three percent lower the first year, two percent lower the second year, and one percent lower the third year.
• Bridge Loan: Financing which is expected to be paid back relatively quickly, such as by a subsequent longer–term loan. Also called a swing loan.

• Cap: The maximum which an adjustable-rate mortgage may increase, regardless of index changes. An interest rate cap limits the amount the interest can change, while a payment cap limits the increase in monthly payment to a specific dollar amount.
• Cap Rate: A net yield set by an investor to determine the value of an income producing property.
• Capital Expenditures: Line items on a profit and loss statement that would not be expensed on an annual basis. This category would include replacement of major building systems, such as roofs, driveways, etc.
• Capitalization Rate: A method used to estimate the value of a property based on the rate of return on investment.
• Comparative Market Analysis: An estimate of the value of a property based on an analysis of sales of properties with similar characteristics.
• Conduit: The financial intermediary that sponsors the conduit between the lender(s) originating loans and the ultimate investor. The conduit makes or purchases loans from third party correspondents under standardized terms, underwriting and documents and then, when sufficient volume has been obtained, pools the loans for sale to investors in the CBMS markets.
• Convertible: An option available on some adjustable rate mortgages (ARM’s) that allows the loan to be converted to fixed rate mortgage. Conversion usually involves paying a one-time fee and conversion may be limited to within a certain time frame.

• Debt Service Coverage Ratio (DSC): A 1.0 means breakeven. The ratio is calculated by taking the net operating income and dividing it by the mortgage payments. Most lenders look for a ratio of 1.25 or higher.
• Debt Service: The periodic payments (principal and interest) made on a loan.

• Escrow: 1. A special account set up by the lender in which money is held to pay for taxes and insurance. 2. A third party who carries out the instructions of both the buyer and seller to handle the paperwork at the settlement.

• FHA: Federal Housing Administration, a government agency.
• Fannie Mae (Federal National Mortgage Association): A congressionally chartered corporation which buys mortgages on the secondary market from Banks, Savings & Loans, Etc; pools them and sells them as mortgage-backed securities to investors on the open market. Monthly principal and interest payments are guaranteed by FNMA but not by the U.S. Government.
• Forward Commitment: A written promise from a lender to provide a loan at a future time.
• Freddie Mac (Federal Home Loan Mortgage Corporation): Entity buys loans from conventional lenders and packages them for sale to investors as securities.

• HUD: Housing and Urban Development, a federal government agency.

• Index: An economic indicator, usually a published interest rate, that determines changes in the interest rate of an adjustable-rate mortgage. ARM rates are adjusted to reflect changes in the index. The margin is the amount a lender adds to the index to establish the actual interest rate on an ARM.
• Interest Rate Cap: Limits the interest rate or the interest rate adjustment to a specified maximum. This protects the borrower from increasing rates.
• Investment Banker: An individual or institution that acts as an underwriter or agent for corporations and municipalities issuing securities, but does not accept deposits or make loans.

• Lease Assignment: An agreement between the commercial property owner and the lender that assigns lease payments directly to the lender.
• Leasehold Improvements: The cost of improvements for a leased property. Often paid by the tenant.
• Lender Margin: This is simply the profit the lender expects to receive from the loan. You can ask your lender what the margin is on an adjustable rate mortgage. Typically, lenders use a discount rate initially as a “teaser” rate. You must be sure to get the normal margin after the discount period is over.
• Lock-Out Period: A period of time after loan origination during which a borrower cannot prepay the mortgage loan.
• London Interbank Offered Rate (LIBOR): The short-term rate (1 year or less) at which banks will lend to each other in London. Commonly used as a benchmark for adjustable-rate financing.
• LTV (Loan to Value): Proposed loan amount divide by the value of the property.

• Negative Amortization: Occurs when interest accrued during a payment period is greater than the scheduled payment and the excess amount is added to the outstanding loan balance (e.g., if the interest rate on ARM exceeds the interest rate cap, then the borrower’s payment will be sufficient to cover the interest accrued during the billing period; the unpaid interest is then added to the outstanding loan balance).
• Net Effective Rent: Rental rate adjusted for lease concessions.
• Net Operating Income (NOI): Total income less operating expenses, adjustments, etc., but before mortgage payments, tenant improvements and leasing commissions.
• Net-Net Lease (NN): Usually requires the tenant to pay for property taxes and insurance in addition to the rent.
• Net-Net-Net Lease (NNN):A lease that requires the tenant to pay for property
  taxes, insurance and maintenance in addition to the rent (also referred to as “Triple-Net Lease”).
• Non-Recourse: A finance term. A mortgage or deed of trust securing a note without recourse allows the lender to look only to the security (property) for repayment in the event of default, and not personally to the borrower. A loan not allowing for a deficiency judgment. The lender’s only recourse in the event of default is the security (property) and the borrower is not personally liable.

• Participation: A type of mortgage where the lender receives a percentage of the gross revenue in addition to the mortgage payments.
• Percentage Lease: Commonly used for large retail stores. Rent payments include a minimum or “ base rent ” plus a percentage of the gross sales “ overage ”. Percentages generally vary from 1% to 6% of the gross sales depending on the type of store and sales volume.
• Phase I: An assessment and report prepared by a professional environmental consultant who reviews the property – both land and improvements – to ascertain the presence or potential presence of environmental hazards at the property, such as underground water contamination, PCB’s, abandoned disposal of paints and other chemicals, asbestos and a wide range of other potentially damaging materials. This Environmental Site Assessment (ESA) provides a review and makes a recommendation as to whether further investigation is warranted (a Phase II Environmental Site Assessment). This latter report would confirm or disavow the presence of environmental hazards and any mitigation efforts that should be undertaken.
• Prime Rate: An artificial rate set by commercial bankers. Many banks will use the Wall Street Prime rate. This is a rate set by the top lending banks in the country.
• Property Classification: Most lenders will classify a property by its age and needed maintenance. As an example many insurance companies will only loan on properties that are class A, meaning that the property’s age is 10 years old or less and is not in need of repair.
• Property Tax: Taxes based on the market value of a property. Property taxes vary from state to state.

• Rate Index: An index used to adjust the interest rate of an adjustable mortgage loan, e.g., the changes in U.S. Treasury securities (T-bill) with 1-year maturity. The weekly average yield on said securities, adjustable to a constant maturity of 1 year, which is the result of weekly sales, may be obtain weekly from the Federal Reserve Statistical Release H.15 (519). This changes in interest rates is the “index” for the change in a specific Adjustable Mortgage Loan.
• Recourse: A loan for which the borrower is personally liable for payment if the borrower defaults.
• REIT (Real Estate Investment Trust): Pooled funds that purchase and hold commercial real estate.
• Rent Step-Up: A lease agreement in which the rent increases every period for a fixed amount of time or for the life of the lease.
• Replacement Reserves: Monthly deposits a lender may require a borrower to place in a reserve account, along with principal and interest payments, for future capital improvements of major building systems (i.e. HVAC, parking lot, carpets, roof, etc.).
• Reserve Funds: A portion of the bond proceeds that are retained to cover losses on the mortgage pool. A form of credit enhancement (also referred to as “reserve accounts”).
• Residual Income: The amount of money left over after you have paid all of your ordinary and necessary debts including the mortgage. This calculation is typically used with VA loans.

• Sale / Lease Back: When a lenders buys a property and leases it back to the seller for an extended period of time.
• SBA: Small Business Administration, a federal government agency.
• Secondary Mortgage Market: The buying and selling of first mortgages or trust deeds by banks, insurance companies, government agencies, and other mortgagees. This enables lenders to keep an adequate supply of money for new loans. The mortgages may be sold at full value (“par”) or above, but are usually sold at a discount. The secondary mortgage market should not be confused with a “second mortgage.”
• Spread: Number of basis points over a base rate index.
• Standby Commitment: A formal offer by a lender making explicit the terms under which it agrees to lend money to a borrower over a certain period of time.

• Tenant Improvements (TI): The expense to physically improve the property to attract new tenants to new or vacated space, which may include new improvements or remodeling. May be paid by tenant, landlord, or both. Typically, the owner provides a tenant with a market rate TI allowance ($/sq.ft.) and the tenant must cover the expense of improvements that exceed the allowance.
• Title: The actual legal document conferring ownership of a piece of real estate.
• Title Insurance: An insurance policy which insures you against errors in the title search – essentially guaranteeing your, and your lender’s, financial interest in the property.
• Triple-Net Lease: A lease that requires the tenant to pay for property taxes, insurance and maintenance in addition to the rent (also referred to as “Net Net Net Lease”).

• Yield Maintenance: A prepayment premium that allows investors to attain the same yield as if the borrower made all scheduled mortgage payments until maturity. Yield maintenance premiums are designed to make investors indifferent to prepayments and to make refinancing unattractive and uneconomical to borrowers.
• Yield To Maturity (YTM): Concepts used to determine the rate of return an investor will receive if a long-term, interest-bearing investment, such as a bond, is held to its maturity date. It takes into account purchase price, redemption value, time to maturity, coupon yield and the time between interest payments. Recognizing time value of money, it is the discount rate at which the present value of all future payments would equal the present price of the bond (also referred to as “internal rate of return”). It is implicitly assumed that coupons are reinvested at the YTM rate. YTM can be approximated using a bond value table (also referred as a “bond yield table”) or can be determined using a programmable calculator equipped for bond mathematics calculations.