There are a number of words which are specific to commercial real estate lending. We thought it might be helpful and educational to you to know some of these words and their meanings. Look them over and if you have any questions, please contact us. We’ll get right back to you.

GLOSSARY OF COMMERCIAL LENDING TERMS

Debt Service Coverage

This is known as DSC. This is a lender’s required ratio between the monthly net operating income of the property and the monthly debt payment. As an example, it would be expressed as 1.30:1.00. This means the lender requires a $1.30 of monthly net operating income to $1.00 of monthly debt payment. The higher the debt service coverage results in a smaller loan amount.

Cap Rate

This is the rate of return an investor wants if he was to pay cash for a commercial income property.

Gross Operating Income

This is the commercial income property’s total rental income, monthly or yearly.

Net Operating Income

This is also known as NOI. The Gross Operating Income less Rental Income Expenses equals the Net Operating Income.

Rental Income Expenses

The actual or projected expenses for a commercial income property, expressed as a percentage and an amount, which include: management fee, rental vacancy factor, replacement and reserve expenses, recurring operating expenses such as water, gas, licenses, waste, etc, property taxes and fire insurance.

Actual Rents

The contract rents of the property.

Market Rents

Usually based upon a market rental analysis by the appraiser, these are the rents at which the property would rent in the market place. Market rents can be higher or lower than the actual rents.

Income & Expense Statement

We have one in our Forms section of this web site. Typically, the lender will require the borrower to complete this form prior to loan submission. The income section is the actual rents and likewise for the expense section. The appraiser will be required to complete a market rent analysis and projected expense budget in his income valuation section of the appraiser.

Market Approach, Income Approach, Cost Approach to Valuation

A commercial appraiser will use all three of these approaches to arrive at his opinion of value. This is one of the reasons that a commercial appraisal report is more expensive than a residential report. The lender will pay particular attention to the Income Approach to Value.

Estoppel Certificates

Estoppel Certificates are used in commercial income leases. They are not used in residential income leases. The certificates are signed statements by the landlord and tenant attesting to the terms of their commercial lease agreement. The landlord and tenant will be ‘estopped’ by the lender from claiming different lease terms at a later date.

Property Analysis

The lender’s analysis of the appraisal report. The final determination of the property’s value resides with the lender, not the appraiser. The lender will review all three approaches to value, paying particular attention to the Income Approach to Valuation and the cap rate the appraiser used in his analysis.

Lock-out Agreement

An agreement between the lender and the borrower which prohibits the borrower from paying off the loan within a set period of time. This is common in Prime commercial loans, not common in Subprime commercial loans.

Yield Maintenance Agreement

A fancy name and formula for a commercial prepayment penalty. The YMA is a lot more expensive than a prepayment penalty. It is typically based upon the total interest the lender would have received over the term of the loan and the actual interest paid by the borrower.

Standard Prepayment penalty

Typically, commercial lenders will use the same formula as a residential prepayment penalty: 80% of six months interest on the principal unpaid balance.

5-4-3-2-1 Prepayment penalty

Another formula used by commercial lenders. This agreement calls for a prepayment fee of 5% of the principal balance paid in the first year of the loan, 4% fee of the principal balance paid in the second year, etc. This penalty is cheaper than the Standard Prepayment penalty.

Subordination Agreement

A written and recorded agreement between an existing lender, the borrower and a new lender, in which the parties mutually agree that the existing lender’s loan is subordinate or junior to the new lender. This is not an easy agreement to get.

Junior Financing Approval Agreement

An agreement between the lender and the borrower in which the borrower agrees to not obtain any secondary or junior trust deeds, without the written approval of the lender. The lender may call the loan all due and payable, if it discovers an unauthorized second deed of trust loan.

Phase I Environmental Report

A report done by an environmental engineer which reveals any known toxic contamination sites on or near the subject property. The report includes a research of the public environmental databases plus a physical site inspection. The report provides the lender with an analysis of the data and recommendations the lender should take. Costs typically range from $200 to $4,000.

Phase II Environmental Report

The research data included in a Phase I report plus a soil sampling analysis of the property. The environmental engineer will take soil borings to look for any actual toxic contamination in the soil or ground water. This is more expensive than a Phase I and typically begins at $4,000 and costs thousands of dollars.

Recourse Loans

An agreement between the lender and the borrower in which the lender has the right to sue the borrower for non-payment of the loan.

Non-recourse Loans

The borrower cannot be sued by the lender for non-payment of the loan.

Personal Guarantees

An agreement between the lender and a third party Guarantor in which the Guarantor agrees to pay the loan for the borrower.

Seller Carry Trust Deeds

Typically, junior or second trust deeds which the Seller is asked to take in a purchase transaction to make up the difference between the lender’s first trust deed loan and the borrower’s down payment. Typical terms are interest only for five years.

F F & E (Furniture, Fixtures & Equipment)

Personal or business property which is used in the real property but which is not valued as part of the real property.

Business Property

The FF&E plus the business inventory and the business goodwill which will be segregated from the real property at the time of a sale and valuation.