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ADJUSTABLE - RATE MORTGAGE (ARM): A mortgage
with an interest rate that changes periodically, according
to an index that is selected when the mortgage is issued.
The initial interest rate is lower than that of fixed-rate
mortgages, but monthly payments can go up or down as the
rate is adjusted.
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.
APPRAISAL: An estimate of the value of a property, made
by a qualified professional called an appraiser.
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): 1/100 th of 1% expressed
as margin over index rate.
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.
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: The costs and fees associated with the
official change in ownership of the property and with obtaining
the mortgage, that are assessed at the closing or settlement.
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 CMBS market.
DEBT SERVICE: The periodic payments
(principal and interest) made on a loan.
DEBT SERVICE COVERAGE RATIO (or DEBT COVERAGE RATIO):
Measures a mortgaged property's ability to cover monthly
payments, defined as the ratio of net operating income over
the mortgage payments. A DSCR of less than 1.0 means that
there is insufficient cash flow generated by the property
to cover required debt payments.
DUE DILIGENCE: The legal definition: a measure of prudence,
activity or assiduity, as is properly to be expected from,
and ordinarily exercised by, a reasonable and prudent person
under the particular circumstances. In CMBS: due diligence
is the foundation of the process because of the reliance
securities investors must place on the specific expertise
of the professionals involved in the transaction.
ENGINEERING
REPORT: Report generated by an architect or engineer describing
the current physical condition of the property and its major
building systems, i.e., HVAC, parking lot, roof, etc. The
report also determines an amount for calculating replacement
reserves, if needed.
ENVIRONMENTAL REPORT: Report generated by qualified environmental
firms to determine potential environmental hazards in a
building's region or within the building itself.
ENVIRONMENTAL RISK: Risk of loss of collateral value
and of lender liability 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 fair market value
and current indebtedness, also referred to as "owner's interest."
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.
FAIR MARKET VALUE: An appraisal term
for the price which a property would bring 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 or sell.
FIXED RATE LOAN: A loan on which the same rate of interest
is charged for the life of the loan.
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; 15-year fixed-rate mortgages are also available.
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 has defaulted. A servicer
may take over a property from a borrower on behalf of a
lender. A property usually goes into the process of foreclosure
if payments are more than 90 days past due.
GROSS INCOME: Total income, before deducting
taxes and expenses. The scheduled (total) income, either
actual or estimated, derived from a business or property.
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: The sum paid for borrowing money, which pays
the lender's costs of doing business.
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 interest rates.
INTEREST SHORTFALL: The aggregate amount of interest
payments from borrowers that is less than the accrued interest
on the certificate.
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.
LOAN ORIGINATION FEE: The fee charged by a lender, to
prepare all the documents associated with your mortgage.
LOAN-TO-VALUE RATIO (LTV): The ratio between the principal
amount of the mortgage balance, at origination or thereafter,
to the current value of the underlying real estate collateral.
The ratio is commonly expressed to a potential borrower
as the percentage of value a lending institution is willing
to finance. The ratio is dynamic, and varies by lending
institution, property type, geographic location, property
size, etc.
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.
MARGIN: The amount that is added to
an index rate to determine the total interest rate.
MATURITY: 1. The termination period of a note (e.g.,
a 30-year mortgage has maturity of 30 years.) 2. In sales
law, the date a note becomes due.
MULTI-FAMILY PROPERTY CLASS A: Properties 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.
MULTI-FAMILY PROPERTY CLASS B: Properties 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.
MULTI-FAMILY PROPERTY CLASS C: Properties provide functional
housing; exhibit some level of deferred maintenance; command
below average rental rates; usually located in less desirable
areas; generally managed by smaller, local property management
companies; tenants provide a less stable income stream to
property owners than Class A and B tenants.
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 an ARM exceeds
the interest rate cap, then the borrower's payment will
not 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.
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.
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.
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.
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 Ð both
land and improvements Ð 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 an environmental hazard
and, should one be found, will recommend additional review
and/or mitigation efforts that should be undertaken.
POINTS (LOAN DISCOUNT POINTS): Prepaid interest on a
mortgage that is usually paid at the time of closing. Each
point is equal to 1% of the total amount of a mortgage (1
point, or 1%, of an $80,000 mortgage would be $800). Most
lenders offer mortgages with several combinations of points
and interest rates; generally, the lower the interest rate,
the more points paid at settlement.
PRINCIPAL: 1. The amount of debt, not including interest,
left on a loan. 2. The face amount of the mortgage.
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 change in U.S. Treasury securities (T-Bills) with 1-year
maturity. The weekly average yield on said securities, adjusted
to a constant maturity of 1 year, which is the result of
weekly sales, may be obtained weekly from the Federal Reserve
Statistical Release H.15 (519). This change in interest
rates is the "index" for the change in a specific Adjustable
Mortgage Loan).
RECOURSE: Personal liability.
REFINANCE: The renewal of an existing loan by the same
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: 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").
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.
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 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, tenants are
provided with a market rate TI allowance ($/sq. ft.) that
the owner will contribute towards improvements. The tenant
must pay for amounts above the TI allowance desired by the
tenant.
TERM: The length of a mortgage.
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 Ð 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
and/or other factors.
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 AVERAGE LIFE: Yield calculation used, in lieu
of "Yield to Maturity" or "Yield to Call," where books are
retired systematically during the life of the issue, as
in the case of a "Sinking Fund," with contractual requirements.
Because the issuer will buy its own bonds on the open market
to satisfy its sinking fund requirements if the bonds are
trading below Par, there is, to that extent, automatic price
support for such bonds; they therefore tend to trade on
a yield-to-average-life basis.
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 to as a "bond yield table") or can
be determined using a programmable calculator equipped for
bond mathematics calculations. |
