 Glossary
of Commercial Real Estate Terms
A B C D E F G H I J K L M
N O P Q R S T U V W X Y Z
AAA
Tenant. A tenant
with a top credit rating. This type of tenant is often critical
to the developer’s ability to arrange both construction and permanent
financing for a major commercial project, such as a shopping
center or office building.
Abandonment. The
voluntary relinquishment of rights of ownership or another interest
(such as an easement) by failure to use the property, coupled with
an intent to abandon (give up the interest).
Abatement. A
reduction or decrease. Usually applies to a decrease of assessed
valuation of ad valorem taxes after the assessment, and levy.
Absorption
Rate. The rate (speed)
at which vacant space is either leased or sold to users in the
marketplace. This rate is usually expressed in square feet per
year or in the case of multi-family housing, in the number of
units per year.
Abstract
of Judgment. A summary of
money judgment obtained in court. (When this summary or abstract
is recorded in the county recorder's office, in some states the
judgment becomes a lien on the debtor's property, both presently
owned or after-acquired.)
Abstract
of Title. A summary prepared by a licensed
abstractor of all documents recorded in the public records of
the political subdivision where the land is located. An abstract
in some states or areas is reviewed by an attorney or other experienced
title examiner to determine the status of title. Virtually every
abstractor today provides actual copies of the records rather
than an abstract of each document
Acceleration
Clause. A cause in a deed
of trust or mortgage, which "accelerates," or hastens, the time
when the indebtedness becomes due. For example, some deeds of
trust contain a provision (an acceleration clause) stating that
the note shall become due immediately upon the sale of the land
or upon failure to pay interest or an installment of principal
and interest
Accommodation
Recording. Recording of instruments
with the county recorder by a title company merely as a convenience
to a customer and without assumption of responsibility for correctness
or validity.
Ackowledgment. A
formal declaration before a duly authorized officer (such as a notary
public) by a person who has executed an instrument that such execution
is his own act and deed. An acknowledgment is necessary to entitle
an instrument (with certain specific exceptions) to be recorded,
to impart constructive notice of its contents and to entitle the
instrument to be used as evidence without further proof. The certificate
of acknowledgment is attached to the instrument or incorporated therein. Acquisition
and Development Loan (A&D Loan). A
loan for the purchase and preparation of raw land for development. Usually
a construction loan or land sale is the source of repayment. Acre. A
measure of land equal to 43,560 square feet
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Adjustable
Rate Mortgage (ARM). A
type of real estate loan in which either the interest rate
charged or the length of the loan, or both, can change. This
type of loan forces the Borrower to absorb the uncertainty
of changes in interest rates during the life of the loan. ARM
loans are normally tied to some index such as government securities. Also
called “variable rate mortgages”.
Administrator. A
person appointed by the probate court to carry out the administration
of a decedent's estate when the decedent has left no will. If a woman
is appointed, she is called an administratrix.
Adverse Possession. A
process of acquiring title to real property by possession for a certain
(statutory) period of time, in addition to fulfilling other conditions.
Affidavit. A
written statement or declaration, sworn to before an officer who
has authority to administer an oath.
Agent. One who has authorization, either
expressed or implied, to act for or represent another party, usually
in business matters, such as issuing title insurance policies on
behalf of a title insurer for a portion of the premium.
Agreement of Sale. A written contract
entered into between the seller (vendor) and buyer (vendee) for sale
of real property (land) on an installment or deferred payment plan.
It is also known as an agreement to convey, a long form Security
Agreement or a real estate installment contract.
Amendment. A change either to alter, add
to, or correct part of an agreement without changing the principal idea or
essence.
American Land Title Association (ALTA). An association
representing more than 2,100 title abstractors, title insurance companies,
title insurance agents, and associate members that was founded in 1907. Members
of the association use standardized title insurance forms developed by ALTA
to provide uniformity within the industry. ALTA’s national headquarters is
located at 1828 L Street, N.W., Suite 303, Washington, D.C. 20036; (202) 296-3671.
Amortization. The
repayment of a mortgage debt over a period of time in a series of
periodic installments. It should be noted that a portion of each
payment consists of a blend of interest and amortization of principal. Specifically,
this is the payback of the principal portion of the loan owed to
the lender. The effect of amortization is to build up the paper value
of the owner's equity while reducing the debt obligation.
Anchor Tenant. A
well-known commercial retail business such as a national chain store
or regional department store (AAA Tenant) strategically placed
in a shopping center so as to generate the most customers for all
of the stores located in the shopping center. Anchored
Centers. A
shopping center with an anchor tenant. Annual
Loan Constant. The ratio of the annual debt payment on a loan
to the original amount borrowed. The loan constant is also referred
to as a mortgage constant.
Annual Percentage Rate (APR). The yearly interest
percentage of a loan, as expressed by the actual rate of interest paid.
For example: 6% add-on interest would be much more than 6% simple interest,
even though both would say 6%. The A.P.R. is disclosed as a requirement
of federal truth in lending statutes.
Arbitrage. The
simultaneous buying and selling of any securities, including mortgages, mortgage
backed securities or futures contracts in different market places, for the
purpose of realizing a profit from different prices.
Assumption. The act of conveying
real property; taking title to a property with the Buyer assuming liability
for paying an existing note secured by a deed of trust against the property.
Attornment. A
tenant’s formal agreement to be a tenant of a new landlord.
Average Daily Rate (ADR). The
average rate charged by a hotel for one (1) room for one (1) day; arrived
at by dividing the total room revenue by the actual rooms occupied.
Average Life. It is
a way to look at the term of a loan or bond that accounts for principal paydowns. If
a loan is interest only with a full balloon at the end, the average life will
equal the maturity. If there is amortization, principal is being paid
over the life of the loan, decreasing the balloon payment and the average life. This
number is then used to find the treasury that has the closest remaining term,
but is not shorter. For example, a 10/25 loan has an average life
of 9 years. 9 years from today is October 2008. The current list
of outstanding, non-callable US treasury securities with maturities in 2008
includes March 2008, June 2008, September 2008 and a December 2008. The
lender would choose the December 2008 because it is longer than the actual
due date.
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Basis
Points. One-100th of
1 percent. Used primarily to describe changes in yield
or price on debt instruments including mortgages and mortgage-backed
securities.
Bankruptcy. A special proceeding under federal,
or in some instances state, laws by which the property of a debtor is protected
by the court and may be divided among the debtor's creditors and the debtor.
Bridge Loan. A
loan which enables a buyer to purchase a property, then allow for
time to rehab and/or increase NOI prior to placement of permanent
financing or enables buyer to get financing to make a down payment
and pay closing costs before selling the present property. Also
called “gap” financing.
Building
Owners & Managers Association (BOMA). An
organization of practitioners who own and manage buildings, most
often office space. Sets the basis by which most regional expense
standards are established. Address: Building Owners and
Managers Association 1221 Massachusetts Avenue NW Washington,
DC 20005.
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Capital
(Reserves) Expenditure (CAP-X).A
major improvement that will have a life of more than one year. Capital
expenditures are generally depreciated over their useful life, as
distinguished from operational repairs, which are subtracted from
income during the year in which they were expended.
Capitalization. The
conversion of a future net income stream into present value by using a specified
desired rate of earnings as a discount rate. This capitalization rate is divided
into the expected periodic income to derive a capital value for the expected
income.
Capitalization Rate. The rate of return on net
operating income considered acceptable for an investor. A rate of
return used to derive the capital value of an income stream. The formula
is Value = annual income divided by the capitalization rate. Also
known as “cap rate”.
Carve-outs. Specific
items that a Lender will require the Borrower to personally guarantee for
the life of the loan. Typically include (but are not limited to) environmental,
fraud, misappropriation of funds, and theft.
Closing Costs. Various
fees and expenses payable by the seller and buyer at the time of a real
estate closing, (also termed transaction costs). Includes brokerage
commissions, lender fees, title insurance, recording fees, prepayment penalty,
inspection and appraisal fees, and attorney’s fees.
Commercial Bank. A financial
institution authorized to provide a variety of financial services, including
consumer and business loans (generally short-term with full recourse to
the Borrower). Commercial banks may be members of the Federal Reserve System.
Commitment Fee. A charge
required by a lender to lock in specific terms on a loan at the time of
Commitment.
Commitment Letter. An
official notification from a Lender to a Borrower indicating that the Borrower's
loan application has been approved. It will state in detail the terms
and conditions of the prospective loan.
Common Area Maintenance (CAM). Operational
expenses related to the maintenance of retail and office properties. Under
a Triple-Net lease the Tenant is required to reimburse the Landlord for
their proportionate amount (based on square footage) of this expense.
Conduit. An
entity which issues mortgage- backed securities backed by mortgages which
were originated by other lenders.
Constant. Percentage
of the original loan paid in equal annual payments that provides principal
reduction and interest payments over the life of the loan.
Construction Loan. A
short-term, interim loan for financing the cost of construction. The
lender advances funds to the builder at periodic intervals as work
progresses. Typically a recourse loan to the borrower.
Consumer Price Index. The
most widely known measures of price levels and inflation that are reported
to the U.S. government. It measures and compares, on a monthly basis,
the total cost of a statistically determined "typical market basket" of
goods and services consumed by U.S. households.
Correspondent. A specialized
type of mortgage banker whose function is limited to the origination of
mortgage loans which are sold to other mortgage bankers or investment bankers
under a specific commitment.
Cost Approach. A
method of appraising property based on the depreciated reproduction or
replacement cost (new) of improvements, plus the market value of the site.
Credit
Rating (Report). An evaluation
of a person's capacity (or history) of debt repayment. Generally
available for individuals from a local retail credit association;
for publicly held companies by such firms as Dunn & Bradstreet;
and for bonds by such firms as Moody's, Standard & Poor’s,
and Fitch's.
Cross-Collateralization. Net
income shortfalls on one property are offset by excess cash flow
from other properties in a pool of “crossed” loans. Significantly
enhances a transaction from the viewpoint of investors and rating
agencies.
Current
Yield. A measurement of investment
returns based on the percentage relationship of annual cash income
to the investment cost.
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Debenture (Bond). A
long-term bond or note issued by governments and/or corporations and not
secured by a mortgage or lien on any specific property. Since there is
no specific property securing the debenture, the ability to repay the debt
is based solely on the financial strength of the issuer.
Debt
Service Coverage Ratio (DSCR). The
relationship between the annual net operating income (NOI) of
a property and the annual debt service of the mortgage loan on
the property. Both Lenders and Investors calculate this ratio
to assist them in determining the likelihood of the property
generating enough income to pay the mortgage payments. From the
lender's viewpoint, the higher the ratio, the better.
Debt Service. The
periodic payment (monthly, quarterly, or annually) necessary to pay
the interest and principal on a loan which is being amortized over
a longer term (usually 25-30 years).
Deed
of Trust. The deed to real property
which serves the same purpose as a mortgage but instead of two parties,
three parties are involved. The third party holds title for the benefit
of the Lender. The Lender is called the “Beneficiary”. The Borrower
is called the “Trustor”. When a loan is made, the Borrower conveys
title to a third party called the “Trustee” who holds the title for
the benefit of the Lender although the instrument itself may remain
in the Lender's possession.
Delegated
Underwriting and Servicing (DUS). Fannie
Mae's principal line for purchasing individual multifamily loans.
We delegate the processing and approval of the loans to our DUS
Lenders, and they take a percentage of the risk.
Defeasance. In
defeasance, the lender replaces the cash flows of the original
loan with actual Treasury Securities. The borrower pays
the lender enough money to buy these securities and the lender
goes out in the bond market and buys the right combination of
bonds. After this is done, and the lender has a security
interest in the treasuries, the property is released as collateral
for the loan and the treasuries become the new loan collateral.
Demand Note. A note having no date for
repayment, but due on demand of the lender.
Discount Rate. The
rate of interest charged to banks who buy money from the Federal
Reserve System. An increase in the rate not only discourages the
banks from borrowing, but it also serves as a signal that interest
rates are probably going to increase. Also, a compound interest
rate used to convert expected future income into a present value
income.
Effective
Gross Income (EGI). Term
used for an income-producing property, derived from the potential
gross income, less a vacancy factor and a collection loss amount.
Equity Participation. The
right of a Lender to a share in the gross profits, net profits or
net proceeds in the event of a sale or refinance of a property on
which the Lender has made a loan. Also known as an “equity
kicker.”
Eminent Domain. The
right of a government to take privately owned property for public
purposes under condemnation proceedings upon payment of its reasonable
value. See Condemnation.
Encroachment. The
presence of an improvement such as a building, a wall, a fence or
other fixture which overlaps onto the property of an adjoining owner.
Encumbrance. A
right or claim upon real property (land) held by one other than the
property owner. Encumbrances are divided into two classes, as follows:
a) Liens
(mortgages, deeds of trust, mechanics' liens, local taxes, assessments,
judgments, attachments, etc.).
b) Encumbrances
other than liens which are limitations on the ownership of the land
(such as conditions, restrictions, reservations, easements, etc.).
Endorsement. Addition
to or modification of a title insurance policy which expands or changes
coverage of the policy, fulfilling specific requirements of the insured.
Equity. (1)
A legal doctrine based on fairness, rather than strict interpretation
of the letter of the law. (2) The market value of real property,
less the amount of existing liens. (3) Any ownership investment (stocks,
real estate, etc.) as opposed to investing as a lender (bonds, mortgages,
etc.).
Estoppel
Certificate. A document by which
a tenant certifies to a Lender that all rental amounts due and owing
are current, and that the Landlord is in compliance with all terms
and conditions of the Lease. Also, a document by which the mortgagor
(borrower) certifies that the mortgage debt is a lien for the amount
stated. The debtor is thereafter prevented from claiming that the balance
due differs from the amount stated.
Expense Ratio. A comparison of
the operating expenses to potential gross income. This ratio can be compared
over time and with that of other properties to determine the relative operating
efficiency of the property considered.
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Fair Market Value (FMV). An
economic concept designating the price at which a willing seller and willing
buyer will agree when both parties are acting prudently, knowledgeably, and
under no compulsion to sell or buy.
Federal National Mortgage Association (FNMA). Commonly
known as "Fannie Mae", the FNMA is the largest buyer of existing mortgages.
The Federal National Mortgage Association 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.
Fee
Simple. An estate under which the owner
is entitled to unrestricted powers to dispose of the property,
and which can be left by will or inherited. Commonly, a synonym
for ownership.
First
Mortgage. A lien
on property in which the lender’s claims are superior to the
rights of subsequent lenders. Certain lenders only make first
mortgages due to regulatory requirements; others limit mortgages
to these senior instruments due to company policy.
Fixed Expenses. Expenditures
such as property taxes, license fees, and property insurance that are not
directly affected, by the occupancy of the property. Fixed expenses along
with operating expenses are subtracted from effective gross income to determine
the net operating income of property.
Forward Commitment. An
agreement between a permanent lender and an interim (typically construction)
lender wherein the permanent lender issues a conditional commitment that
will replace the construction loan once a given set of terms and conditions
have been achieved.
Fully Amortized Mortgage (Loan). A
loan that is fully repaid at maturity by periodic (monthly) reductions
of the principal. The first part of each monthly payment covers interest
on the outstanding debt as of the payment due date and the remainder of
the payment goes to reduce the outstanding debt.
Gross Lease. A lease of a commercial
property whereby the landlord (lessor) is responsible for paying all property
expenses, such as taxes, insurance, utilities, and repairs.
Hedging. The purchase
or sale of mortgage future contracts by a mortgage banker or lender for
the purpose of protecting cash transactions made at a future date.
Income Approach. A
method of appraising property based on the property’s anticipated future income. Once
the net income is established, it is then divided by the estimated capitalization
rate to arrive at a fair market value.
Interim Financing. A loan, including
a construction loan, used when the property owner is unable or unwilling
to arrange permanent financing. Generally arranged for less than 3 years,
used to gain time for operations and or market conditions to improve.
Index. A
published interest rate, such as prime rate, LIBOR, T-Bill rate or the
11th District
COF. Lenders use indexes to establish interest rates charged o mortgages
or to compare investment returns.
Ingress and Egress. Applied
to easements, meaning the right to go in and out over a piece of property
but not the right to park on it.
Internal Rate of Return. (IRR) The
true annual rate of earnings on an investment. Equates the value of cash
invested with cash returns. Considers the application of compound interest
factors. Requires a trial-and-error method for solution.
Joint Venture (JV). An
agreement by two or more individuals or entities to engage in a single
project or undertaking. Joint ventures are used in real estate development
as a means of raising capital and spreading risk. For all practical purposes
a joint venture is similar to a general partnership. However, once the
purpose of the joint venture has been accomplished, the entity ceases to
exist.
Land Acquisition Loan. A
loan made for the purpose of purchasing land only not improvements
on or to the land. Also called an “acquisition loan.”
Lease Abstract. A
detailed recap of office and retail leases including tenant name, suite
#, square footage, current rental rate including increases, lease start
date, term, CAM requirements, extension options and rates.
Leasing Commission (Reserve) Escrow. The
annual cost related to the leasing and releasing of commercial office and
retail space. The amount deducted from the Net Operating Income prior
to determining the net cash flow available for debt service coverage.
Legal
Description. A description of land recognized
by law, based on government surveys, spelling out the exact
boundaries of the entire piece of land. It should so thoroughly
identify a parcel of land that it cannot be confused with any
other.
Lessee. An
individual or entity to whom property is rented under a lease.
A tenant.
Lessor. An
individual or other entity - one who rents property to another
under a lease. A landlord.
Letter of Credit. An
arrangement, with specified conditions, whereby a bank agrees
to substitute
its credit for
a customer's.
Leveraged Buy-out. The
acquisition of a company, financed primarily with borrowed money, using
the acquired company’s assets to collateralize the loan.
LIBOR (London Interbank Offered Rate). The
rate that international banks dealing in Eurodollars charge each other
for large loans. Some domestic banks and other lenders use this rate as
an index for adjustable rate mortgages. The LIBOR rate quoted in the Wall
Street Journal is an average of rate quotes from five major banks. Bank
of America, Barclays, Bank of Tokyo, Deutsche Bank and Swiss Bank.
Limited Partnership. Arrangement
in which there is at least one partner whose liability extends beyond
monetary investment and at least one partner who is passive and limits
liability to the amount invested.
Loan Application Fee. A charge
required by a lender or loan originator to be paid by the borrower to cover
the credit report, property appraisal and other incidental expenses associated
with underwriting the loan. The fee is generally not refundable.
Loan-To-Value Ratio (LTV). The amount
of money borrowed compared to the cost or value (appraised or sale price)
of the real property purchased.
Lock-Box. Rental
income is delivered to a trustee (or servicer), who then pays expenses
and makes the loan payment, before excess cash is released to the borrower. The
lock-box removes borrower discretion and control over funds.
Locked-in Interest Rate. The
rate promised by a lender at the time of loan application or commitment.
On income property loans, a lock-in generally requires a commitment fee
or rate lock fee from the loan applicant.
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MAI
(Member, Appraisal Institute) Appraisal. A
demonstrative narrative report of a specific market’s economic
condition and an assessment of property value performed
by a member of the American Institute of Real Estate Appraisers. The
property’s value is derived using three (3) separate methods
of valuation including replacement cost approach, sales comparison
approach and income approach.
Management Fee. The amount charged
by an independent company for the day-to-day management of a property. Typically
based upon a percentage of the property’s income.
Market Approach. A
method of appraising property by analyzing sales prices of similar properties
(comparables) recently sold.
Market and Feasibility Study. A
detailed analysis of activities in a market in regard to such influences as
location, demand and competition which may or may not affect the value of property. Includes
an analysis of a real estate project to determine the most profitable use and
the likelihood of the proposed use being a financial success. The study is
often used by the promoter or developer to inure would-be investors to participate
in the venture and to assist lenders in making their decision whether or not
to loan the necessary funds.
Market Rent. The
rental income that a property is likely to command in the under current
market
conditions. Market rent, also referred to as economic rent, may be either
higher or lower than what the property is actually renting for under the
terms of a lease.
Mechanics
Lien. A lien created
by statute for the purpose of securing priority of payment
for the price or value of work performed and materials furnished
in construction or repair of improvements to land, and which
attaches to the land as well as the improvements. |
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