A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
1031 exchange
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, which monitor timing, prepare documentation and hold funds between sale and purchase, are often used.
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.
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A
Acceleration
A mortgage lender’s right to demand immediate payment from borrowers upon default of their loan.
Acquisition and development
A loan provided for the purpose of developing raw land.
Additional advance
A supplemental loan given to borrowers while they are completing their mortgage transaction. These advances are often paid as a percentage of the mortgage.
Amortization
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 that 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.
Appraisal
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.
Appreciation
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.
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B
Bond
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.
Bridge loan
A short-term loan given to a borrower until permanent financing becomes available.
Building permit
A government-issued document that gives a builder authority to construct or modify a structure.
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C
Capital gain
The difference between an asset’s appreciation and the price paid when it was initially acquired.
Capital-gains tax
Tax on profits received from the sale of capital assets.
Cash-out refinance
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 the bridge loan and once the final project costs are calculated, will issue the permanent loan.
Closing costs
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.
Comparables
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
Law that states that the current property-owners are liable for cleanup of environmental factors existing on a site.
Construction completion loan
A loan provided to cover project cost overruns. Typically, a bank will lend a set amount for construction projects, and if borrowers experience cost overruns, they are required to pay them (no additional bank funding is available). If borrowers experience a cash shortfall, construction completion loans cover the difference. Because the borrower is typically in a critical situation, the interest rates on these loans are generally higher.
Construction loan
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.
Contingency
Funds reserved as a buffer to cover any cost overruns or unexpected expenses. In loan underwriting, this is often added to the estimated cost of a construction project. Typically calculated as a percentage of estimated construction costs.
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:
1. 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.
2. 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.
3. Public-records information: State and county court records on bankruptcy, tax liens or monetary judgments. Some consumer-reporting agencies also list nonmonetary judgments.
4. Recent inquiries: The names of those who have obtained copies of the consumer’s credit report within the past year or two years for employment purposes.
Credit score
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 FICO score.
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D
Debt-service-coverage ratio (DSCR)
A calculation used in commercial real estate underwriting to determine whether income from the property can service the debt. 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 public record that indicates a lien on a property. The lien represents a debt outstanding, and the property is held as collateral. If the debt is not paid, the lender can foreclose on the property. If the debt is paid in full, the lien will be canceled. When buying or selling a property, typically, any liens must be satisfied before closing.
Default
When a debtor is unable to pay a mortgage loan, resulting in a violation of the legal contract.
Deferred interest
Interest that accrues but that 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 amount.
Downpayment
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.
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E
Environmental risk
The potential loss of collateral value because of the presence of hazardous materials on a property. Such materials may include asbestos, polychlorinated biphenyls, radon or leaking underground storage tanks.
Equity
The difference between a property’s market value and the outstanding loan amount.
Escrow account
A trust account in which cash or other assets are held to pay for expenses pending satisfaction of contractual obligations.
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F
Financial statements
Historical financial reports of assets, liabilities, capital, income and expenses.
Fixtures
Items that are attached to a property. These may include heating and air-conditioning systems, wall-mounted shelves and security systems.
Flagged hotel
A hotel belonging to a nationwide franchise.
Flood zone
A geographical area officially designated by the federal government, subject to potential flood damage. Lenders must complete a Federal Emergency Management Agency (FEMA) flood-hazard-determination form prior to funding a property. If the property is situated in a potential flood zone, it is required to carry flood-insurance protection. The 100-year flood plain — or areas where floods have a 1-percent chance of equaling or exceeding the elevation each year — is the basis for most FEMA determinations.
Foreign national
An individual who is currently in the country but who has not been granted the legal right to permanent residency.
Franchise
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.
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G
Garden apartment
In real estate finance, this usually refers to a multifamily development or project in which tenants have access to a shared lawn area.
Good-faith deposit
A monetary deposit made by a purchaser to indicate genuine interest in the purchase of a property.
Graduated-payment mortgage
A loan designed to start with smaller initial payments. Payments then increase at a predetermined rate.
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H
Hard-money loans
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 rather than to credit history. Loan-to-value ratios are usually less than 70 percent, and credit scores, if required, are less than 500. Hard-money lending is also referred to as private, equity or portfolio lending.
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I
Improved land
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 people who do not qualify for Social Security numbers, such as aliens working in the United States.
Installment loan
A loan that requires regular, fixed payments over a specific period of time, such as car and student loans.
Intangibles
Assets that lack physical substance, such as goodwill, patents and trademarks.
Interest
The price paid for borrowing money, calculated on an annual percentage basis.
Interim financing
A short-term loan issued prior to permanent financing.
Interim statements
Financial statements issued for periods less than one year.
Investment property
Real estate owned for income or capital appreciation rather than the owner’s personal use.
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J
Joint tenancy
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.
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L
Leasehold improvements
The cost of improvements made on leased property, often paid by the tenant.
Lien
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-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.
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M
Market value
Determined by a property appraisal, an estimate of what a buyer would expect to pay for an asset under current market conditions.
Maturity
The time at which a loan’s principal balance must be paid.
Mezzanine financing
A loan with a detachable warrant that lets the lender share in the borrower’s future success. Typically, this is a financing layer between debt and equity.
Mini-perm loan
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 balloon is in place to provide funding during the ramp-up period, with the assumption that it will easily be converted into a permanent loan once the property is seasoned.
Mixed-use properties
Properties built/zoned for commercial and residential use. They typically feature ground-level commercial space with residential apartments or condominiums above.
Mortgage
A loan that is paid over time and secured by real estate. The lender retains the legal right to sell the property if there is a breach in contract, such as a failure to pay.
Mortgage broker
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.
Multifamily
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 therefore not considered multifamily.
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N
Net-net lease
A lease in which, in addition to the rent, the tenant pays for property taxes and insurance.
Non-owner-occupied property
Income-producing property in which the owner does not live or operate a business from. 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.
Nonrecourse loan
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 (80 percent to 90 percent) to ensure the lender is protected should the loan go into default.
Nonresident aliens
Lawful residence granted to foreigners living and working in the United States on a nonimmigrant visa. 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.
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O
Office condos
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 the allotted timeframe.
Owner-builder
A property-owner who assumes responsibility for the overall job of building a property, rather than using a general contractor.
Owner-occupied businesses
Businesses that operate out of the building they own.
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P
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.
Power of attorney
The legal right to make decisions on another’s behalf, provided that person does not become incompetent or disabled.
Prepayment
Early repayment of a loan.
Prepayment penalty
A fee charged to borrowers for early repayment of their loan. When a lender issues a note, it anticipates a guaranteed rate of return on its investment. If the loan is paid off early, this has financial impact on the lender; consequently, this is passed on to the borrower in the form of a prepayment penalty. While it varies on a case-by-case basis, the fee is often calculated based on a percentage of the overall loan and gradually decreases over time.
Example: Borrowers may incur a 10-percent prepayment fee if the note is for held less than a year, but if the note is held for 10 years, they may be charged a 1-percent fee.
Principal
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.
Private money
Typically short-term, high-interest-rate loans by private individuals or small companies. Although the rates for these loans are often higher than conventional loans, private-money loans are often available when other lending sources aren’t. Also known as hard money.
Pro forma
Financial adjustments made off the balance sheet, reflecting the impact of recent or anticipated changes.
Projections
Financial statements that predict future income, cash flow and balance sheets. They typically span multiple periods of time.
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Q
Quit-claim deed
A legal term indicating one party has terminated its interest in the property.
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R
Raw land
Land that remains unused and in its natural state. Raw land is historically free from any improvements such as grading, construction or subdividing.
Refinancing
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.
Rent roll
A detailed list of tenants on a property, outlining the square footage and area leased, amount paid in rent, lease terms, etc.
Rent step-up
A rental agreement in which the monthly rent payment increases over a fixed period or for the life of the lease.
Right of rescission
A three-day period after refinancing or obtaining a line of credit during which borrowers can back out of the loan.
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S
Seller carry-back
An agreement in which the seller provides financing for all or part of the purchase price.
Special-use/single-purpose 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 or 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.
Subordinate financing
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 situation. Consequently, the interest rate is usually higher.
Sweat equity
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 by lender.
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T
Tenants in common (TIC)
Two or more individuals holding title on a property.
Title
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.
Title insurance
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.
Triple-net lease (NNN)
A lease in which, in addition to the rent, the tenant is required to pay for property taxes, insurance and maintenance.
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U
Underwriting
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.
U.S. Small Business Administration (SBA) loans
Loans given to small businesses that fall within SBA guidelines. SBA loans are designed to spur economic growth, and, as a result, if the borrower qualifies, the terms for these loans are typically more favorable than a bank loan (e.g., lower interest rates and longer terms). Preferential treatment is given to underrepresented business-owners, including women and minorities, and rural areas. The two types of SBA loans are 7(a) and the 504.
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W
Warehouse line
A line of credit extended to mortgage bankers to allow them to provide mortgage loans. With the line, they often can make quicker lending decisions and fund loans faster than the typical bank approval process.
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