This article contains an fairly exaustive list of Commercial Mortgage Real Estate terms. If you would like an explanation for a term you don't see here, or would like to submit some of your own glossary terms, please contact us.

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

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

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

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

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

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.

CAM Expense Definition

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

CAP Rate Definition

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 property classification for properties that are above average in terms of design, construction and finish; command the highest rental rates; have a superior location, in terms of desirability and/or accessibility; generally are professionally managed by national or large regional management companies.

Class B Property Definition

A property classification for properties that frequently do not possess design and finish reflective of current standards and preferences; construction is adequate; command average rental rates; generally are well maintained by national or regional management companies; unit sizes are usually larger than current standards.

Class C Property Definition

A property classification for properties that provide adequate functionality, exhibit some level of deferred maintenance; command below average rental rates; usually located in less desirable areas; genially managed by smaller, local property management companies; tenants provide a less stable income stream to property owners than Class A and B tenants.

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?

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.

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

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

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

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

Gross Reimbursement Structure Definition

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

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.

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 Options Definition

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. 

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

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.

LTV Definition

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

How to calculate the LTV of a property?

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 or Net Operating Income Definition

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

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

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

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 loans usually have clauses that nullify the personal liability. These standard carve outs include fraud and misrepresentation.

REIT Or Real Estate Investment Trust Definition

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.

Single Tenant Investment Grade Definition

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

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's Definition 

The S&P or Standard & Poors ss one of the four primary rating agencies.It is currently owned by McGraw-Hill and can be found at its website.