Commercial Mortgage Loan Real Estate Glossary

Adjustable Rate Mortgage: A mortgage where the interest rate adjusts periodically, up or down. Also called a floating rate mortgage. Also called ARM.

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.

Amortization: The process of paying the principal and interest on a loan through regularly scheduled installments.

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 apartment building.

Appraisal: An estimate of the value of a property, made by a qualified professional called an appraiser.

ARM: Adjustable Rate Mortgage. See above.

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 a margin over index rate.

B C & D Lender or Loan: The term B C & D is a rating of the loan. We refer to B C & 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. 

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 (ARM) may increase. 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.

Closing: The meeting between the buyer, seller and lender (or their agents) where the property and funds legally change hands. Also referred to as "settlement."

Closing Costs: Fees associated with obtaining the mortgage and transferring the property.

Commercial Conduit: Direct link to an institutional lending source.

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. 

Convertible: An option available on some adjustable rate mortgages (ARM's) that allows the loan to be converted to fixed rate mortgage. 

Cosigner: Someone who is willing to sign mortgage loan obligation with you in case you default on your monthly payments. Normally, the cosigner is required to go through the same application and approval process as the original signer of the loan.

Credit Company: A lending organization that obtains it source of funds from the commercial market.

Credit Enhancements: A loan to provide improvements to the property.

Credit Report: A search through your existing credit history by a qualified credit bureau to determine if, and the number of times, you may have been delinquent on monthly payments or debts.

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

Debt Service: The periodic payments (principal and interest) made on a loan.

Debt Ratio: A calculation performed by a lender to determine if you can afford a particular monthly payment. The debt ratio (also known as the obligations ratio) is the sum of all your monthly debt payments including your total monthly mortgage payment divided by your total monthly income. Typically acceptable debt ratios for Conventional Loan are 36 - 38%, FHA Loans are 41 - 43%, and VA Loans Are 41%.

Discount Rate: Many lenders may offer you a lower "teaser" rate on an adjustable rate mortgage for the initial period. After this period is over, the lender will adjust the rate.

Downpayment: The amount of money you put down, normally anywhere from 5 - 25%.

Due Diligence: The investigation or exercise of care that the lender takes before entering into an agreement or contract.

Engineering Report: Report generated by an architect or engineer describing the current physical condition of the property and its major building systems, such as HVAC, parking lot, roof, etc. The report helps calculate replacement reserves, among other things.

Environmental Report: Report generated by a qualified environmental firm to determine potential environmental hazards in a building's region or within the building itself.

Environmental Risk: Risk of loss due to the presence of hazardous materials, such as asbestos, PCB's, radon, or leaking underground storage tanks (LUSTS) on a property.

Equity: The difference between the amount owed on the loan and the current purchase price of the home or property

Equity Capital: Capital raised from owners. In a commercial real estate case, a lender will also provide equity capital for a percentage of ownership.

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

Fair Market Value: The price which a property would sell for, in a competitive market, given a willing seller and willing buyer, each having a reasonable knowledge of all pertinent facts, with neither being under any compulsion to buy and sell.

Fannie Mae: A congressionally chartered corporation which buys mortgages on the secondary market from banks, and other mortgage holders in order to pool and sell 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.

FHA: Federal Housing Administration, a U.S. government agency.

Fixed Rate Mortgage: A mortgage with an interest rate that remains constant for the life of the loan. The most common fixed-rate mortgage is repaid over a period of 30 years, but other lengths are available.

Floating Rate Mortgage: See Adjustable Rate Mortgage.

Floor-To-Area Ratio (FAR): The relationship between the total amount of floor space in a multi-story building and the base of that building. FAR's are dictated by zoning laws and vary from one neighborhood to another, in effect stipulating the maximum number of stories a building may have.

Foreclosure: The process by which a lender takes back a property on which the mortgagee had defaulted. A servicer may take over a property from a borrower on behalf of a lender. A property usually goes in to the process of foreclosure if payments are no more than 90 days past due.

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.

Government Loans: Loans such as VA or FHA loans (see above) that are partially backed by the U.S. government and are meant to help veterans or low-to-moderate income families afford homes. The advantages of these types of loans in that they often have a lower interest rate, are easier to qualify for, have lower down-payment requirements, and can be assumed by someone else if the home is sold. 

Graduated Payment Mortgages: A type of mortgage where the monthly payments start low but increases by a fixed amount each year for the first five years of the loan. 

Gross Income: Total income, before deducting taxes and expenses. 

Growing Equity Mortgage: A type of mortgage where the monthly payments start low but increase by a fixed amount each year for the entire life of the loan.

Hard Equity: High interest rate financing.

Housing Ratio: Also known as the income ratio, this is the total monthly payment including taxes and insurance divided by total monthly income. Typically acceptable housing ratios for Conventional Loans are 28 - 33% and FHA Loans are 29 - 31%.

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. 

Interest: Money paid for the use of money lent, or for delaying the repayment of a debt.

Interest Rate: The sum charged for borrowing money, expressed as a percentage.

Interest Rate Cap: Limits the interest rate or the interest rate adjustment to a specified maximum. This protects the borrower from increasing rates.

Interest Shortfall: The aggregate amount of interest payments from borrowers that is less than the accrued interest on the certificate.

Investment Banker: An individual or institution which acts as an underwriter or agent for corporations and municipalities issuing securities, but which does not accept deposits or make loans. 

Jumbo Loans: A mortgage loan that exceeds the amount that is acceptable by the government if the loan were to be resold on the secondary market to Fannie Mae or Freddie Mac. 

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: The profit the lender expects to receive from the loan. 

Lines of Credit: An arrangement in which a bank or vendor extends a specified amount of unsecured credit to a specified borrower for a specified time period.

Loan origination Fee: The fee charged by a lender, to prepare all the documents associated with a mortgage.

Lock-In: The process of fixing the interest rate for a specific period of time irrelevant of future or impending economical changes to the interest rate. This process may require a fee or premium.

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 (1year 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 divided by the value of the property.

Margin: The amount that is added to an index rate to determine the total interest rate.

Maturity: The termination period of a loan (e.g., a 30-year mortgage has maturity of 30 years).

Mortgage Banker: An entity that makes loans with its own money and then sells the loan to other lenders.

Mortgage Broker: An entity that arranges loans for borrowers.

Mortgage Insurance: A type of insurance changed by most lenders to offset the risk of your loan when your down payment is less than 20% of the value of the home.

Mortgage Reduction Programs: A type of Accelerated payment program whereby payments are made more frequently usually bi - weekly or weekly rather than the traditional monthly payment. Making more frequent and accelerated payments reduces the amount of principal more quickly which interest accumulation is based on. The net effect can be a savings on the total interest paid

Multi-Family Property: A classification of housing where multiple separate housing units for residential inhabitants are contained within one building or several buildings within one complex. Units can be next to each other, or stacked on top of each other. A common form is an apartment building.

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.

Notice of Default (NOD): To initiate a non-judicial foreclosure proceeding involving a public sale of the real property securing the deed of trust. The trustee under the deed of trust records a Notice of Default and Election to Sell ("NOD") the real property collateral in the public records.

Operating Expense: Periodic expenses necessary to the operation and maintenance of an enterprise (e.g., taxes, salaries, insurance, maintenance). Often used as a basis for rent increases.

Phase I and Phase 2 Environmental Site Assessment (ESA): An assessment and report prepared by a professional environmental consultant who reviews the property, 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. A Phase 1 ESA provides a review and makes a recommendation as to whether further investigation is warranted, called a Phase 2 ESA. This latter report would confirm or disavow the presence of an mitigation efforts that should be undertaken.

PITI: Principal, interest, taxes and insurance. Your calculated estimate of monthly payments.

Points: Loan fee paid by the borrower. One point is 1% of the loan amount.

Prepayment Penalty: A fee for paying off a loan before it is due.

Pre-qualification: The process of determining the amount of money a particular lender will let you borrow. 

Prime Rate: An interest rate set by commercial bankers. Many banks will use the Wall Street Prime rate. 

Principal: The face amount of the mortgage. The amount of debt, not including interest, left on a loan. 

Property Appraisal: A report showing exactly how much a home or property is worth.

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 (see above).

Property Tax: Taxes based on the market value of a property. Property taxes vary from state to state.

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.

Refinance: The renewal of an existing loan by a borrower.

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 that a lender may require a borrower to a reserve in an 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: Money retained to cover losses. 

Residual Income: Residual income (also known as passive or recurring income) refers to income that you continue to earn even after the work required is done. 

Sale / Leaseback: When a lender buys a property and leases it back to the seller for an extended period of time.

Savings & Loans: A federally or state chartered financial institution that takes deposits from individuals, funds mortgages, and pays dividends.

SBA: Small Business Administration, a Federal government agency.

Second Mortgage: A mortgage on real estate, which has already been pledged as collateral for an earlier mortgage. The second mortgage carries rights, which are subordinate to those of the first.

Secondary Financing: A loan secured by a mortgage or trust deed, in which the lien is junior, or secondary, to another mortgage or trust deed.

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.

Structural Report: (see Engineering Report)

Tax & Insurance Impound: Monthly deposits that a lender may require to be included with principal and interest payments for the payment of taxes and insurance.

Tenant Improvements (TI): The expense to improve a property in order to attract new tenants to new or vacated space. May be paid by tenant, landlord, or both.

Term: The length of a mortgage.

Title: The 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").

Underwriting: The process of deciding whether to make a loan based on credit, employment, assets, or other factors.

Uniform Residential Loan Application (1003): This application, also called a URL-1003 is the standard loan application used by all lenders.

Underwriter: The underwriter is the lender or company who provides the money for a loan. 

Upfront Fees: Generally refer to fees charges to pay for third party costs like appraisals.

VA (Veterans Administration) Loan: A type of government loan administered by the Veterans Administration. Eligibility for a VA loan is restricted and limited to qualifying veterans, and to certain home types. 

Workouts: Attempts to resolve a problematic situation, such as a bad loan.