IN ADDITION THE APPLICATION OF THE
COMMERCIAL LOAN TERMS WILL BE SHARED.
The following list consists of Key Commercial Loan Terms
and Definitions the new or experienced investor should
be very familiar with.
Some of the definitions in this list were taken from the
book "Commercial Real Estate Finance Basics",
published by Mortgage Bankers Association of America,
2000 by Gary Hutto.
Absorption - the amount of commercial
space that the market will use during a specified period
(Application) A developer who understands the meaning
of this commercial loan term will need to project what
his absorption of his units will be when determining how
much debt service he will continue to hold as he sells
off his units.
Acquisition Loan - additional
capital from either private investors or from a money
center such as a bank, savings and loan or a credit union
to purchase or take down the land.
For a complete discussion of Acquisition
Assessment District - is
a financing tool available to most existing legislative
bodies (cities, counties, special districts), that allows
that agency to construct desired and authorized public
improvements, with the costs and expenses being apportioned
and spread against the benefited properties within the
boundaries of a designated area (assessment district),
with said costs and expenses being directly proportioned
in accordance with the special and direct benefits that
each parcel receives from the works of improvement.
For a complete discussion of Assessment
Balloon Loan - any loan that
requires a lump sum payment of principal at some time.
(Application)A developer will need to be aware of any
final payments that will become due because the loan is
not self-amortizing, i.e. paying itself of in equal installments.
Bridge Loan - a short-term financing
which is expected to be paid back relatively quickly,
such as by a subsequent longer-term loan. It may also
be called a swing loan or known simply as bridge financing
Bullet Loan - a variation of a
balloon loan requiring payments of interest only, the
balloon equals the original balance of the loan.
(Application) A Developer will have to come up with the
full amount of the original loan at the end of the bullet
period, if he indeed understands the significance of this
commercial loan term and therefore must budget accordingly
when selling off his units, or have another loan in place
to replace the interest only note.
Cap Rate, Capitalization Rate
- the capitalization rate is basically the required return
on a product.
(Application)A new investor will purchase property based
on a cap rate, by analyzing the various prices of property
based on cap rate the investor can determine if he is
paying a fair price for the investment.
For a complete discussion of Cap
Construction Loans - loans designed
to pay for the development phase in stages. By providing
collateral, usually by pledging the land (assuming the
land is free and clear, which means no debt), the lender
will disburse funds according to the schedule of production
for the project.
For a complete discussion of Construction
DCR, Debt Coverage Ratio
- the ratio of NOI (net operating income) to
the anticipated debt service.
(Application)The investor must be aware of whether the
loan has a high probability of getting funded. The higher
the DCR, the greater likelihood of the deal closing. A
low DCR yields a property that is not cash flowing,
For a complete discussion of DCR
Factoring - a
type of financial service whereby a firm sells or transfers
title to its accounts receivable to a company, which then
acts as principal, not as agent. The receivables are sold
without recourse, meaning that the factor cannot turn
to the seller in the event accounts prove un collectible.
For a complete discussion of Factoring
Gross Potential Income
- the total rental revenues of the property,
as if the property is 100% leased up.
(Application)The new investor will represent the property’s
earning potential at 100% occupancy. Lenders will use
this calculation to determine underwriting requirements
then reduce the PGI by a standard vacancy factor being
applied in that particular market.
Index - in a
variable or an adjustable rate mortgage the base interest
rate (prime, LIBOR, Fed Funds, T- BIlls, etc.) upon which
the loan's interest rate is calculated.
(Application)By being aware of which index rate is being
recommended the investor can determine the volatility
of his loan payments, based on the volatility of the index
rate selected by the lender.
Leverage - is
the process of utilizing an investors capital to multiply
your individual rate of return due to the fact that you
borrowed capital rather than used your own capital to
procure the investment.
For a complete discussion of Leverage
LTV, Loan to Value Ratio - the
amount of debt as compared to the value of the property.
(Application) The Down payment the developer can come
up with will determine the LTV, and therefore will dictate
what type of loan programs the investor will qualify for.
Mezzanine Financing -
a hybrid of debt and equity financing. Mezzanine financing
is basically debt capital that gives the lender
the rights to convert to an ownership or equity interest
in the project if the loan is not paid back in time and
in full. It is generally subordinated to debt provided
by senior lenders such as banks and venture capital companies.
Mini Perm -
a short-term financing used to pay off income-producing
construction or commercial properties, usually payable
in three to five years.
NOI, Net Operating Income - is
the gross income of the property less direct operating
costs, but excluding depreciation, amortization and interest
(Application)The investor’s bottom line is NOI, and NOI
will dictate what loan if any will be approved, as well
as how much money the investor will have for his discretionary
income at the end of the fiscal year.
For a complete discussion on NOI
Rent Measurements; Rent Per Square Foot
- annual rent is divided by Square footage
Return on Investment; ROI
- is the measuring rod that all investors
should be using when they are entertaining the purchase
of a property. What return on you receiving on the
dollars that you actually invested not borrowed.
For a complete discussion on ROI
SBA Loans - are loan that are
guaranteed by the Small Business Administration and issued
by various financial institutions throughout the United
States and are solely used for the acquisition, or expansion
of an owner occupied business. Each of the programs
are designed to cover a variety of business, needs, thus
providing the most options to small businesses.
For a complete discussion on SBA
Vacancy Ratio - the
percentage of the property that is not occupied. The ratio
is the quotient of the dollar vacancy divided by gross
potential. (Application) BY Being aware of this commercial
loan term an investor can determine how much real income
he is to derive, but more importantly being aware of what
vacancy factor the underwriter will apply will help in
determining the feasibility of the financing.