Loan Glossary

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 – both 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. 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 – 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.