Glossary

Acquisition and Development Loan (A&D Loan): This is a loan that provides for the purpose and the preparation of raw land for subdivision use. It may also be used in the development of income property land. It usually includes the streets and all utilities. The source of repayment is a construction loan or sale of the property. Baltimore Financial arranges financing on A&D loans.

Adjustable Rate Mortgage (ARM): A mortgage which permits the lender to adjust the rate of interest upwards or downwards in accordance with a specified index.

Apartment Building: A type of property intended for permanent residents who lease a specific space or unit. Payment for use of the space is referred to as rent.

Assisted Living: Refers to providing the elderly various services that they are no longer able to do independently; for instance, food preparation, cleaning, and personal hygiene. However, care provided in an assisted living facility does not rise to the level of nursing home care, since the elderly using assisted living services are still somewhat independent.

Big Box: A large retail store occupying at least 100,000 square feet of space or more. Big boxes refer to those retailers who use a warehouse or warehouses/ showroom approach to selling of merchandise. Big box retailers include Home Depot, Target, and Wal-Mart. Some retailers who have stores smaller than 100,000 square feet but who utilize the warehouse and warehouse/ showroom concept called small boxes. Small boxes include such companies as: Comp USA, Office Depot, and Staples.

Bridge Loan: A loan that spans a gap between two other loans. A bridge loan can arise if a builder decides to pay off the higher interest construction loan but not sell the project for few years, when he feels the interest rates will improve. This type of loan is usually outstanding for two to five years and can be prepaid with little or no penalty.

Commercial Mortgage Backed Securities (CMBS): Securities sold to investors which are collateralized by commercial mortgages. Mortgages are pooled, securitized and sold to investors.

Community Shopping Center: A shopping center, usually a strip, housing at least two anchors – typically a supermarket and a discount retailer. Community shopping centers range from 100,000 to 300,000 square feet according to the ICSC.

Convertible Mortgage: A mortgage (usually 10 years) where the lender also retains the option to call the loan or assume a percentage of of the equity in the property (in some cases it may be 100 percent) at some specified point during the loan term. Convertible mortgages are usually used only for commercial properties. The lender is usually a pension fund or other tax exempt entity. The loan usually covers all costs and sometimes includes a cash bonus for the developer.

Condominium: A system of ownership of individual units in a multiunit structure, combined with joint ownership of commonly used property (sidewalks, hallways, stairs, etc.

Conduit: An aggregator of commercial mortgage loans. A conduit generally aggregates commercial loans and then arranges for the securitization of those loans and the sale to Wall Street. 

Construction Loan: A Construction loan, is a loan for the purpose of constructing new property or an addition to existing property. A construction loan is a short-term loan, usually less than two years; funded through a series of draws as construction occurs. Construction loans are often interest-only loans with the interest capitalized. The interest rates on these loans are often variable, using such things as an index and a margin over the index.

Congregate Care: Refers to multifamily housing, living units designed for seniors who pay some congregate services as a part of the monthly fee or rental rate and who require little, if any assistance with activities of daily living.

Co-op: Where an association (a corporation) owns a housing unit and members rent from the association. Members have the right to rent by virtue of the membership in the association. When members leave the unit, they can sell their membership to outsiders, but the outsider usually must be approved by the association.

Credit Company: A lending organization whose source of funds is the stock market, the commercial paper market, commercial banks and the bond market. 

Debt/Equity Combination Mortgages: Where the lender requires a share of the equity in a project as well as interest and repayment of principal. Baltimore Financial arranges financing for debt & equity.

Debt Service: The principal and interest required annually, quarterly or monthly by note.

Debt Service Coverage (DSR) Ratio: Mathematical equation used by lenders to determine  the amount of mortgage payments a building’s cash flows support.

Debt Yield Ratio: The Debt Yield Ratio is defined as the Net Operating Income (NOI) divided by the first mortgage debt (loan) amount, times 100.  What it tells a lender what the cash-on-cash return on its money if it foreclosed on the commercial property on day one. This ratio does not even look at the cap rate used to value the property.  It does not consider the interest rate on the commercial lender’s loan, nor does it factor in the amortization of the lender’s loan. The only factor that the Debt Yield Ratio considers is how large of a loan the commercial lender is advancing compared to the property’s NOI.  Commercial lenders want to make sure that low interest rates, low caps rates, and high leverage don’t push real estate valuations to sky-high levels.

Defeasance: Defeasance is a method for reducing the fees required when a borrower decides to prepay a fixed-rate commercial real estate loan. Instead of paying cash to the lender, the defeasance option allows the borrower to exchange another cash flowing asset for the original collateral for the loan. The new collateral (normally Treasury securities) is usually much less risky than the original commercial real estate assets. In this scenario, the lender is afar better off because it receives the same cash flow and in return receives a much better, risk-adjusted investment. Although the benefit of defeasance for the lender is obvious, the borrowers can create value and put cash in their pockets at prepayment.

Equity: The ownership interest in a commercial property, generally expressed as the difference between the value or cost of a property and the outstanding balance of any indebtedness on the property.

Fed:  The Federal Reserve System includes 12 regional reserve banks and a board of governors (The Fed) in Washington, D.C.  The Fed supervises its member banks, issues regulations aimed at promoting sound banking practices, makes loans to banks in temporary need and controls the money supply.  Reserve banks hold member banks’ reserves and issue new currency (Federal Reserve Bank notes).

Federal Deposit Insurance Corporation (FDIC):  An agency of the federal government which insures accounts contained in member institutions and repays the depositors in the event that the bank or S&L should fail.  In the event of a failure, the FDIC will total all of a person’s deposits in the institution, including savings accounts, checking accounts, CDs and other deposits and reimburse for loss up to a maximum of $100,000.

Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac):  Freddie Mac buys conventional loans from S&Ls, banks and mortgage bankers.  Most of the loans bought by Freddie Mac are packaged into pools and sold to investors as securities (called Participation Certificates or PCs).  Freddie Mac also guarantees pools of mortgages held by local lenders (PC swaps).  Local lenders can then sell the PCs as securities and not mortgages.

Federal Housing Administration (FHA):  A government agency which insures mortgages.

Federal National Mortgage Association (Fannie Mae):  Fannie Mae buys conventional loans from banks, S&Ls and mortgage bankers.  It packages some of the loans as securities and then sells them to Wall Street investors.

Fixed Rate Mortgage: A loan with a promissory note that reflects an interest rate that remains constant for the entire term.

Flex Space: A building providing its occupants the flexibility of utilizing the space. Usually provides a configuration allowing a flexible amount of office or showroom space in combination with manufacturing, laboratory, warehouse distribution, etc. Typically also provides the flexibility to relocate overhead doors. Generally constructed with little or no common areas, load-bearing floors, loading dock facilities and high ceilings. 

Floating Rate Mortgage: A loan with a promissory note that reflects an interest rate that may be adjusted periodically. For example, the interest rate on certain commercial loans may be tied to a short-term index rate like prime or LIBOR (London Interbank Offered Rate).

Forward Commitment: A pledge from a lender to provide a loan at a future date, sometimes loans.

Gap Financing: An interim loan made to provide funding during the time between the end of loans extended during the development stage of a project and the beginning of the permanent mortgage extended to the buyer.

Government National Mortgage Association (GNMA, Ginnie Mae):  A HUD agency.  GNMA attracts capital into the mortgage market by guaranteeing pools of mortgages that have previously been guaranteed by FHA and VA with a U.S. Treasury guarantee.  GNMA also buys below-market-rate mortgages which are federally subsidized or are part of a guaranteed housing program for low and middle income families.  The agency sells these loans to FNMA or other investors at market rates, absorbing the difference as a housing subsidy.

Hard Money Loan:Also know as Private Money, Hard money loans are considered a non-bankable loan. For a hard money loan, the underwriting decisions are based on the borrower’s hard assets (real estate). Hard money loans typically close relatively quickly, but typically cost more and the interest rate is much higher. Baltimore Financial arranges financing for hard money loans.

Industrial Property: Property used for industrial purposes, such as factories.

Industrial Revenue Bond (IRB):  A bond to be used for the construction or rehabilitation of public buildings and installations which is to be retired by the income from the building or installation.  IRB income is exempt from federal taxation, some municipalities’ and states’ taxation, and some foreign countries’ taxation.

Institutional Equity: Investment in real property that is provided by institutions such as pension funds, life companies or, corporations.

Interim Loan: A short term real estate loan of any type, payable generally in two years or less.

Intermediate Loan:  A loan maturing between six and nine years of origination.  Intermediate loans usually require amortization of the principal.  The due date is usually shorter than the amortization term.

International Monetary Fund (IMF):  An association of governments to promote international cooperation, the expansion and growth of international trade, and exchange stability.  The IMF permits members to adjust a poor balance of payments without resorting to destructive measures.

Joint Venture (JV): A financial partner who provides capital for a project and shares in the project’s profits. LC’s and other institutional or private lenders may fund joint ventures in which most of the developer’s costs are covered. Typically a lender would be entitled to a percent of the ownership. Joint Venture lenders often require that their return be a proffered return.

Land Loan: A loan in which the security for the deal is entitled or unentitled raw land. 

Land Sale/Leaseback:  A situation where an investor purchases land and then leases it back to the developer for a fixed rent and other considerations.  The lender concurrently issues a mortgage on the leasehold at current market rates.  This usually includes a kicker.  This deal often provides more dollars than a mortgage.

London  Interbank Offered Rate (LIBOR): this is the interest rate that London banks charge when lending to one another in order to manage their balance sheets. The LIBOR is equivalent of the American Federal Funds Rate and is used as a benchmark for other short term interest rates. many construction loan rates are quoted at a spread above LIBOR.

Life Company: A life company invests its capital in and provides real estate debt and equity.

Loan to Cost (LTC): Refers to the ratio of the price paid for an asset to the value of the loan that finances its purchase. The ratio is used in real estate construction projects in order to compare the amount of the loan financing the project to the building costs. The LTC helps real estate lenders assess the risk of a construction loan. The higher LTC ratio indicates higher risk.

Loan-To-Value ratio (LTV): The amount of debt as compared to the value of the property. A higher loan to value ratio means higher leverage and thus greater risk. The ratio is calculated by dividing the loan amount by the appraised value of the property. Required loan to value ratios vary by property type, guarantees regulation and competition.

Lock-in: A loan provision providing that the loan cannot be paid off for a specific period of time.

Mezzanine Loan: A mezzanine loan is a second mortgage loan that is subordinate to a first mortgage on a property. Typically used to maximize leverage on a property and/or to meet a first mortgage lender’s qualification requirements. Baltimore Financial arranges financing for Mezzanine loans.  

Mini-Perm Loan: An intermediate term loan that sometimes bridges the gap between construction and permanent financing to allow occupancy and income to stabilize. The mini-perm may have a two-tiered payment structure including, small interest only for several years and then payment based on some amortization period. A mini-perm is a loan that does not fully amortize and, accordingly, requires a balloon payment upon maturity. The terms for mini-perms are usually from three to seven years.

Mixed Use: A property that contains more than one type of commercial space. For example, a building with retail, office and apartment space is a mixed-use facility. 

Mortgage: A lien on a borrower’s real estate required by a lender to secure its debt to the borrower. 

Mortgage Broker: A company which locates borrowers and lenders and arranges the financing between the two. The mortgage broker takes no risk or loss and doesn’t service the loan. Mortgage brokers can shop lenders much more effectively than borrowers. Brokers are in the market everyday, where developers are in the market a few times during the year. Brokers receive price information from lenders daily as a matter of course. They have a relationship with multiple lenders and are therefore well positioned to find and compare among the lenders offering particular features on the most competitive basis.

Multi Family Housing: A structure consisting of housing units for a number of different family units. Quite often zoning ordinances require a special zoning classification for multifamily housing.

Neighborhood Shopping Center: A shopping center, typically a strip, with at least one anchor. Developers normally anchor neighborhood centers with a supermarket and sometimes a pharmacy. Neighborhood centers range in size from 30,000 to 100,000 square feet.

Net Lease: A lease where the lessee pays certain expenses directly. The most common form is the triple net lease, where the tenant pays operating costs, taxes, and insurance. Triple-net leases are found in situations where the tenant leases all the property.

Net Operating Income (NOI): Net operating income is effective gross income less direct operating costs but excluding depreciation, amortization, and interest expense. It is synonymous with operating cash flow before debt service. Expenses below NOI are sometimes referred to as “Below the Line” items. 

Non-Recourse: An indebtedness that is secured by specific collateral (the real estate) and one that does not permit the lender access to the borrower’s or borrower principal’s assets in the event of default. 

Office Building: A structure used primarily for the carrying on of business. 

Planned Unit Development (PUD): A master-planned mixed-use property, which generally includes such things as single family lots, commercial office buildings, retail, church sites, and schools. A homeowner’s association owns common areas of the PUD. Each property owner owns a non-exclusive right to use association’s common areas. 

Participating Mortgage: Many lenders offer this mortgage, which is similar to a traditional fixed rate mortgage, but which includes a kicker for the lender. The kicker is usually a percentage participation in the increases in gross income above the scheduled gross. Most of the borrower’s costs can be covered with these loans. 

Pension Funds (PF’s): 1) Accumulated capital, investments and other assets held by private corporations, unions, society, public agencies, etc., for the present and future payment of retirement benefits to employees; 2)  The organization within each company, union, society, public agency, etc., which is responsible for these monies and for their collection, investments and disbursal. A pension fund invests in and provides real estate debt and equity. 

Private Money: Private money is commonly used term in banking and finance. It refers to lending money to a company or individual by a private individual or organization. While banks are traditional sources of financing for real estate, and other purposes, private money is offered by individuals or organizations and may have non traditional qualifying guidelines. There are higher risks associated with private lending for both the lender and borrowers. There is traditionally less “red tape” and regulation. Private money can be similar to the prevailing rate of interest or it can be very expensive. When there is a higher risk associated with a particular transaction it is common for a private money lender to charge an interest rate above the going rate.

Real Estate Investment Trust (REIT): A REIT is a special corporate form of entity permitted by the Internal Revenue Code (IRC). In order to qualify as a REIT, the company must meet certain mandated requirements. Generally REIT’s are not taxed as long as they met those mandated requirements. REIT’s provide debt and equity on existing real estate. 

Refinancing: The repaying of a debt with the proceeds from a new loan using the same property as collateral. The reason generally, for refinancing is to get a lower interest rate or to increase the loan amount. 

Specialty Stores: Stores that specialize in selling some specific product as opposed to department stores, which sell a little bit of everything. Johnson & Murphy, the shoe seller, is an example of a specialty shoe seller and Barnes & Noble is an example of a specialty bookstore. 

Standby Commitment: The lender makes a commitment while not expecting to fund unless the project gets into trouble. The terms are sometimes rough. While no actual funding is usually involved, a developer can use a standby commitment to get a construction loan, that otherwise would be unattainable. 

Step-Down Prepayment Penalty (PPP): A step down prepayment penalty is graduated and steps down each subsequent year- for example, 5% in the first year that prepayment is allowed, 4% in the second, etc. It is, accordingly, reversed tiered.

Strip: A neighborhood or community shopping center built on a strip of land (hence the name). Developers generally anchor neighborhood centers with a supermarket and community shopping centers with a supermarket and one or more discount retailers.  

Subdivision: A parcel of land that has been divided into two or more smaller lots. An example would include a 500-acre tract that has been platted and made ready for the building of homes. The subdivision has been recorded in the land records of the county where the land is located and is available for individuals to purchase the lots and or builders to purchase the lots and in turn construct houses on the lots.

Super-Regional Centers:  Large shopping centers that offer a variety of shopping alternatives. A super-regional may include several anchor department stores and a variety of specialty stores. Developers may construct super-regional centers as enclosed malls, open-air malls or large strips with a number of buildings and out-parcels.

Yield Maintenance Provision:  A form of prepayment found in commercial mortgage loans. A Yield Maintenance Provision in most cases requires that the mortgagor pay the mortgagee, an equal amount equal to the discounted differences between a specified risk-free borrowing rate and the note rate.

Warehouse: A building used to receive and store goods and merchandise. In terms of classifying such property, warehouses are normally located in an area zoned for either commercial or industrial property.

Wraparound: A mortgage in which the lender assumes the first mortgage. The debtor makes one mortgage payment to the wrap around lender who, in turn, sends the proper portion to the first mortgagee. The wrap lender usually receives a portion of his yield from the amortization of the first mortgage.