Commercial Lending Glossary
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An exchange of business or investment property for another property of equal or lesser value for which Internal Revenue Service (IRS) Code 1031 allows capital-gains deferral. To satisfy the IRS regulations, a replacement property must be identified within 45 days of the sale of the original
property, and closing must occur within 180 days. Third-party 1031-exchange intermediaries are often employed to monitor timing, prepare documentation and hold funds between sale and purchase.
4506, 4506-T or 8821
Consent forms that grant the lender rights to obtain and verify borrowers’ tax-return information from the Internal Revenue Service (IRS). The forms are used for the following purposes:
- Form 4506, “Request for Copy of Tax Return,” is used to obtain a complete copy of the tax returns submitted to the IRS.
- Form 4506-T, “Request for Transcript,” is used to obtain a line-item summary of the tax returns submitted to the IRS, as well as 1099 and W-2 information.
- Form 8821, “Tax Information Authorization,” is used to gain information about previous taxation issues. It is not used to obtain tax returns or transcripts.
A mortgage lender's right to demand immediate payment from a borrower who defaults on a loan.
Acquisition and development loan
A loan provided for the purpose of developing raw land.
Supplemental loans given to borrowers while they are completing their mortgage transactions. These advances are often paid as a percentage of the mortgage.
A process by which borrowers make monthly principal payments to gradually reduce their mortgage debt.
American Society of Testing Materials (ASTM)
Organization that defines environmental regulations used to set the benchmark for standardized environmental reporting. Commercial real estate developers can satisfy Comprehensive Environmental Response, Compensation and Liability Act requirements using ASTM standards for
environmental site assessments.
Annual percentage rate (APR)
The annual cost associated with borrowed funds expressed as a percentage.
A dated, written document in which the property’s value has been determined by a qualified real estate expert. From a lending perspective, the appraised value is considered valid for 120 days.
The increase in value of an asset. Real estate may appreciate due to a number of factors, including inflation-rate increases, limited supply of inventory, highly desired location or the local economy’s growth rate.
An oversized payment due at the end of a mortgage, commercial loan or other amortized loan. Because the entire loan amount is not amortized over the life of the loan, the remaining balance is due as a final repayment to the lender. Balloon payments are often prepackaged into what are
called "two-step mortgages." In this type of mortgage, the balloon payment is rolled into a new or continuing amortized mortgage at the prevailing market rates. Balloon payments can occur within fixed-rate or adjustable-rate mortgages (ARMs).
A mortgage loan with multiple properties as collateral.
Long-term debt sold to investors. Mortgage loans are often bundled together and sold as mortgage-backed bonds. Proceeds from the sale of the bonds generate new revenue streams for banks, allowing them to continue issuing new loans.
A short-term loan given to a borrower until permanent financing becomes available.
A government-issued document that gives a builder authority to construct or modify a structure.
Business credit report
A compilation of a commercial entity's credit history and risk.
The difference between an asset’s appreciation and the price paid when it was acquired.
Tax on profits received from the sale of capital assets.
Refinancing a current mortgage at a higher loan amount and taking the difference in cash.
Certificate of occupancy (C of O)
A key piece of documentation in commercial real estate that is issued when building construction is complete. The C of O indicates that no other work is required and that all inspection requirements have been satisfied. In commercial finance, when the borrower receives the C of O, the
lender will close a temporary bridge loan and, once the final project costs are calculated, issue a permanent loan.
Fees associated with the acquisition of real estate. These include, but are not limited to, lender fees, credit checks, title insurance, and survey and recording fees.
Commercial mortgage-backed securities (CMBS)
A type of mortgage-backed security that is secured by loans on commercial property. A CMBS can provide liquidity to real estate investors and to commercial lenders.
Used to determine the market value of a property, based on comparisons of like-properties sold within a specific geographical area and time period. Also known as comps.
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) of 1980
A federal law designed to clean up and establish liability for hazardous waste sites, also known as Superfund sites.
Construction completion loan
A loan provided to cover project cost overruns. Typically, a bank will lend a set amount for construction projects, and borrowers are required to pay for or finance any additional costs. If borrowers experience a cash shortfall, construction completion loans cover the difference. Because the borrower is typically in a critical situation, interest rates on these loans are generally higher than for conventional loans.
A loan issued for the construction or major renovation of a property. As work is completed during the various stages of construction, money is paid out to borrowers incrementally in the form of draws.
Construction output price index (COPI)
A measure of the cost of work being executed in a given period. The index was originally designed to measure the inflation-adjusted value of construction output, but is also used in a range of other statutory and contractual applications.
Money reserved as a buffer to cover cost overruns or unexpected expenses in a project. In loan underwriting, the fund is often tied to and calculated as a percentage of estimated construction costs.
A mortgage broker/banker who originates, funds and sells mortgage loans through a relationship with a larger lender, in accord with the larger lender's underwriting guidelines and program offerings.
Credit report (Personal)
A record of consumers’ credit activities. These activities are tracked by three credit bureaus: Equifax, Experian and TransUnion. According to the Federal Reserve Bank of San Francisco, four main categories are documented in personal credit reports:
- Identifying information: Full name, any known aliases, current and previous addresses, Social Security number, year of birth, current and past employers and, if applicable, similar information about spouses.
- Credit information: Accounts held with banks, retailers, credit card issuers, utility companies and other lenders. Listed by type of loan, such as mortgage, student loan, revolving credit or installment loan; the date the account was opened; the credit limit or loan
amount; any co-signers of the loan; and consumers’ payment pattern over the past two years.
- Public-records information: State and county court records on bankruptcy, tax liens or monetary judgments. Some consumer-reporting agencies also list nonmonetary judgments.
- Recent inquiries: The names of those who have obtained copies of the consumer’s credit report within the previous two years.
A numerical valuation based on personal credit reports that is used to evaluate a borrower’s credit risk. The range on credit scores is 300 to 850. Also referred to as a FICO score.
Debt-service-coverage ratio (DSCR)
A calculation used in commercial real estate underwriting to determine whether income from a property can service the debt associated with the property. To calculate debt service coverage, divide the net operating income by total debt service for the subject property. A DSCR greater than 1
indicates a positive cash flow, and a DSCR less than 1 indicates negative cash flow. Ideally, lenders look for a DSCR of 1.2 or higher.
Debt-to-income ratio (DTI)
A calculation based on total monthly debt payments divided by total monthly income. This is a percentage-based result, and measures the level of lending risk.
Deed of trust
A document created under state law that documents a pledge of real property to secure a loan. The deed of trust involves the trustor (borrower), the beneficiary (lender) and the trustee. The trustee is a third party who holds title and is empowered to foreclose on the property should the
The failure of a debtor to meet a legal obligation of a loan, i.e. the failure to make a payment, or payments, on a mortgage loan.
Interest that accrues, but remains unpaid. For instance, on some adjustable-rate mortgages for which borrowers choose a fixed monthly payment, the monthly payment may not satisfy the entire monthly expense as the interest rate changes. The outstanding unpaid interest is added to the loan
A borrower’s initial contribution toward a property purchase. To obtain a loan, most lending programs require some form of downpayment, based on a percentage of the total purchase price.
Draws on demand
Taking funds from a construction budget to pay suppliers and contractors on demand.
EB-5 Immigrant Investor Program
A program created by federal law, under which immigrants to the U.S. may be granted visas by investing minimum amounts ranging from $500,000 to $1 million in new commercial enterprises. Investments must meet location and job-creation criteria.
The potential loss of value because of the presence of hazardous materials on a property. Such materials may include asbestos, polychlorinated biphenyls, radon or leaking underground storage tanks.
- The difference between a property’s market value and the debt owed on the property. If a borrower owes $700,000 on a loan for a property valued at $1 million, the borrower has $300,000 in equity in the property. Can also be expressed in negative terms.
- The value of shares issued in a commercial real estate enterprise, or other company.
Equity line of credit
A credit product in which a property owner borrows against the owner's equity in a commercial property, as needed. Typically, there is a fixed period of time that a borrower can draw on the loan, after which it is converted to a term loan.
A trust account in which cash or other assets are held to pay expenses pending satisfaction of contractual obligations.
Historical financial reports of assets, liabilities, capital, income and expenses.
Items that are attached to a property. These may include heating and air-conditioning systems, wall-mounted shelves and security systems.
A hotel belonging to a nationwide corporation or franchise.
A geographical area designated by the federal government as subject to potential flood damage. Lenders must complete a Federal Emergency Management Agency (FEMA) flood-hazard-determination form prior to funding a property to determine whether a property is localed in a potential flood zone
and required to carry flood insurance. The 100-year floodplain — or areas where floods have a 1-percent chance of equaling or exceeding the elevation each year — is the basis for most FEMA determinations.
An interest rate that is allowed to move up and down with the rest of the market or with an index. This contrasts with a fixed interest rate, in which the interest charged on a debt obligation stays constant for the duration of the agreement. A floating interest rate is also referred to as a
variable interest rate.
An individual residing in a country, but who has not been granted the legal right to permanent residency.
A business method in which independent owners operate under a right or license agreement to distribute goods or services.
Free and clear
Ownership of an asset without debt obligations.
In real estate finance, this usually refers to a multifamily development or project in which tenants have access to a shared lawn area.
A monetary deposit made by a purchaser to indicate genuine interest in the purchase of a property.
A loan designed to start with smaller initial payments. Payments then increase at a predetermined rate.
A type of financing that typically provides funds for hard-to-fund projects or short-term purposes. Hard-money lenders generally give more consideration to the value of the property, or collateral, than to credit history. Loan-to-value ratios are usually less than 75 percent, and credit
scores, if required, can be less than 500. Also referred to as equity lending.
A parcel of land that has been developed for use. Improvements may include electrical, water, telephone or sewer lines; grading, landscaping, roads or gutters; and construction of permanent structures.
Individual Taxpayer Identification Number (ITIN)
An alternative to a Social Security number, which is used for federal and state taxation purposes. ITINs are assigned to those who do not qualify for Social Security numbers, such as foreign nationals working in the U.S.
A loan that requires regular, fixed payments over a specific period of time, such as car and student loans.
Assets that lack physical substance, such as goodwill, patents and trademarks.
The price paid for borrowing money, calculated on an annual percentage basis.
A short-term loan issued prior to permanent financing.
Financial statements issued for periods of less than one year.
Real estate owned for income or capital appreciation rather than the owner’s personal use.
An ownership structure between two or more people. Under joint-tenancy law, if one of the owners dies, the surviving owners are granted the decedent’s interest.
The cost of improvements made on leased property, often paid by the tenant.
A legal claim against an asset for an outstanding debt. If the asset is sold, all liens against the asset must be cleared before a transfer of title can occur.
Loan-to-cost ratio (LTC)
A percentage calculated by dividing the loan balance of a construction project to the cost of building the project.
Loan-to-value ratio (LTV)
A percentage calculated by dividing the loan balance of a property by its market value. The higher the LTV, the greater risk for the lender. Consequently, loans with more than 80-percent LTV have higher interest rates and typically require private mortgage insurance.
Determined by a property appraisal, an estimate of what a buyer would expect to pay for an asset under current market conditions.
The time at which a loan’s principal balance must be paid.
A loan that comes with a warrant that lets the lender convert to equity-interest in a property if the loan is not repaid in full.
A commercial loan with a balloon payment and a three- to five-year term. Mini-perms are obtained for projects without an established operating history. The loans provide funding while projects are being established, with the assumption that they will be converted into permanent
loans once the property is in use.
Properties built and/or zoned for commercial and residential use. They typically feature ground-level commercial space with residential apartments or condominiums above.
A loan that is paid over time and secured by real estate. The lender retains the legal right to acquire and sell the property if there is a breach in the loan contract, such as a failure to pay.
An individual who sources mortgage loans and serves as an intermediary between borrowers and lenders. Brokers charge a fee for their services, which is typically based on a percentage of the loan amount.
Properties that are constructed for multiple-family use, such as apartments or duplexes. If the building is sold as a complete unit, condominiums can also be considered multifamily properties. However, condominiums typically are sold as individual units, and not considered
A lease in which, in addition to the rent, the tenant pays for property taxes and insurance. Commercial tenants are also might also be required to pay maintenance costs on a property (See Triple-net lease).
Income-producing property in which the owner does not live or operate a business. Many lenders consider non-owner-occupied properties to be higher-risk, and as a result, mortgages for these properties may carry a higher interest rate.
A loan that is secured by collateral (e.g., a home or building), but for which the borrower is not held personally liable. If the lender seizes the property and the sale does not cover the loan, the borrower is not responsible for the shortfall. Nonrecourse loans typically have a lower
loan to value ratio (80 percent to 90 percent) to increase the lender's level of protection should the loan go into default.
Immigration status granted to foreign nationals living and working in the United States on nonimmigrant visas. The most common types of visas are tied to a sponsoring institution or employer (e.g., EB-1, F-1, H-1B, J-1, etc.). For tax purposes, nonresident aliens are taxed on U.S.-based
trade, business or employment income.
Office units that business owners can buy rather than lease.
On-time completion bonus
A bonus given to a contractor for finishing the construction of a home or commercial project within an allotted timeframe.
A property-owner who assumes responsibility for the overall job of building a property, rather than using a general contractor.
Businesses that operate out of the building they own.
An interest rate used as the reference point for which a mortgage lender will neither pay a rebate (yield spread premium or negative points) or require discount points for a mortgage.
Passive real estate
Income-producing properties that do not require active involvement in their day-to-day operations, such as storage facilities and carwashes.
Permanent resident aliens
Foreigners who have been granted permanent residence in the United States and have been issued a permanent-resident card (aka, green card) but who do not have U.S. citizenship. For tax purposes, permanent residents are taxed on their global income.
Personal Financial Statement
Planned urban development (PUD)
A type of community zoning classification that is planned and developed within a city, municipality and/or state that contains both residential and non-residential buildings (such as shopping centers). Open land, such as for parks, is also often included PUD zones.
Preferred lending partner
Power of attorney
The legal right to make decisions on another’s behalf.
Early repayment of a loan.
A fee charged to borrowers for early repayment of their loan, to compensate the lender for lost interest payments.
The original amount of money borrowed on a loan.
Principal reductions with reamortization
Reducing the loan’s principal balance and applying the existing interest rate to the remaining principal over the life of the original loan term.
Typically short-term, high-interest-rate loans by private individuals or small companies. Also known as hard money.
Financial adjustments made off the balance sheet, reflecting the impact of recent or anticipated changes.
Financial statements that predict future income, cash flow and balance sheets. They typically span multiple periods of time.
A legal term indicating one party has terminated its interest in the property.
Land that remains unused and in its natural state. Raw land is historically free from any improvements such as grading, construction or subdividing.
Process by which a loan is paid off with proceeds received from a new loan. The same property is used as collateral for the new loan. Loans may be refinanced for several reasons, including more favorable terms, change of lenders, access to equity, change of guarantors, etc.
A detailed list of tenants on a property, outlining the square footage and area leased, amount paid in rent, lease terms, etc.
A rental agreement in which the monthly rent payment increases over a fixed period, or for the life of the lease.
Right of rescission
Borrowers' ability to back out of a loan, usually established by law as a specific time period.
Small Business Administration (SBA) loans
The federal Small Business Administration guarantees bank loans that are structured to meet SBA requirements. The 7(a) program is the most popular for starting, acquiring and expanding businesses. The 504 program supports long-term, fixed-rate mortgages for fixed assets - usually buildings, land and machinery. The
loans are intended to promote economic growth, and are offered at terms that are often more favorable that conventional bank financing.
The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.
An agreement in which the seller provides financing for all or part of the purchase price of a property.
An income-producing property designed for a specific purpose. In most cases, a significant expense would be required to convert this type of property to a general-purpose facility. Examples include restaurants, carwashes and hotels.
Subdivision construction loans
Loans for the construction of single-family and multifamily subdivisions, typically ranging from two to 30 homes. Financing is provided for all phases, including land acquisition, development and construction.
A secondary or “junior” lien on a property. If there is a foreclosure, the primary-lien holder is paid first. For lenders, taking a subordinate position involves more risk, as well as the potential that they won’t get paid in a foreclosure. Consequently, the interest rate is usually
Providing labor, rather than cash, toward the completion of a project. Often this term applies to a property under construction for which the owners do some of the work. This is a cost-saving technique with a fair market value. Lenders accept sweat equity on a case-by-case basis, which varies
Tenants in common (TIC)
Two or more individuals holding title on a property.
Evidence of legal ownership. With real estate, it establishes the owner’s right to occupy and eventually sell the property without a third-party interest.
Insurance policy that protects borrowers and lenders against title defects. The fee for this is typically included in real estate closing costs and paid to a title company or attorney who provides due diligence to ensure the property is marketable.
Treasury bill (T-bill)
A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26
weeks).T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, they provide a return to the bondholder through appreciation.
Triple-net lease (NNN)
A lease in which, in addition to rent, the tenant is required to pay for property taxes, insurance and maintenance. Commercial leases might also require tax and insurance payments, but not the cost of maintenance (See Net-net lease).
A legal form that a creditor files to give notice that it has an interest in the personal property and/or income related to the collateral backing a commercial mortgage.
Process used by lenders to determine borrower eligibility and ability to repay a loan. A number of factors are evaluated, including personal credit history, financial statements, employment history and salary. In commercial real estate finance, these factors also include business
financial records, history and projections.
USDA Business and Industry Loan Program (USDA B&I)
United States Department of Agriculture loan-guarantees made to rural businesses to improve a community's economic condition.
A line of credit extended to mortgage bankers to allow them to provide mortgage loans. With the line, they often can make faster lending decisions and fund loans faster than through typical bank approval process.