This glossary of business lending terms has been provided as a courtesy to help you understand information relevant to Business Lending & Services.
Click on the first letter of the word you are looking for. You will find a list of words in alphabetical order starting with that letter.
| A | B | C | D | E | F | G | H | I | J | L | M | N | O | P | Q | R | S | T | U | V | W | Z |
A
A1031 Exchange:
A section of the Internal Revenue Code. In a nutshell, it is a way for the owners of business and investment real estate to sell their property and buy other like kind property without paying the capital gains tax. It allows for the investor to continue his investment in another property without loosing investment equity in taxes.
AAA Credit:
A person or business with a top credit rating.
Abandonment:
The voluntary relinquishment of an interest, claim, privilege or possession of property.
Acquisition and Development ( A&D Loan):
Debt financing, usually in the form of a construction loan or land sale and is the source of repayment. It is usually used for the purchase and preparation of raw land for development.
Acreage:
A measure of land equal to 43,560 square feet or 4,840 square yards.
Adjustable Rate Loan:
A loan that initially is lower than a fixed rate that can change based on the index plus the margin periodically. It is usually fixed for a certain period of time – typically 6 months up to five years.
Amendment:
To either change by altering, adding to, or correcting part of an agreement without changing the principal idea of the essence.
Amortization:
The process of paying principle and interest on a loan through regularly scheduled payments.
Anchor Tenant:
A tenant that is a well-known commercial retail business such as a national chain store or a regional department store that is strategically placed in a shopping center so as to generate the most customers for all of the stores located in the shopping center.
Anchored Centers:
A shopping center that has at least one anchored tenant.
Appraisal:
An estimate of the value of a property by a qualified professional called an appraiser.
Apartment Conversion:
When a rental apartment building is converted into individually owned units.
Assisted Living:
Assisted living facilities are for people needing assistance with Activities of Daily Living (ADLs) but wishing to live as independently as possible for as long as possible. Assisted living exists to bridge the gap between independent living and nursing homes.
Average Annual Occupancy:
This is the percentage of units that are rented out with in a year’s period of time.
Average Daily Rate:
Statistical unit used to measure a hotel’s pricing scale. It is derived dividing the total room revenue by the actual rooms occupied.
B
Balloon Payment:
This is a large principle payment that becomes due at the conclusion of the loan term. Generally, it reflects a loan amortization over a longer period than the term of the loan itself. (i.e. payment based on a 30 year amortization but the principal balance is due after the first 5 years). This is often called a bullet loan.
Basis Points:
1/100th of 1% expressed as margin over the index rate.
BC & D Loan:
The term describes the rating of the loan. It is a program specifically for a borrower that has some problems or credit trouble.
Bridge Loan:
Financing that is expected to be paid back relatively quickly, such as by a subsequent longer term loan. This is also known as a swing loan.
Bullet Loan:
A loan that requires a balloon payment at the end of the term and anticipates that the loan will be refinanced in order to meet the balloon payment obligation. Essentially, sometimes the financing is not available at the end of the balloon and is often due to the property not performing as anticipated. This borrower is considered “shot” and the property is subject to foreclosure.
C
Call:
The lien-holder has a call provision that is noted in the original contract in which the note may be called and due in full and is typically a 5 year or a 10 year call.
Cap:
The maximum which an adjustable-rate loan my increase, regardless of index changes. An interest rate cap limits the amount the interest rate can change, while a payment cap limits the increase in monthly payment to a specific dollar amount.
Cap Rate:
A net yield set by an investor to determine the value of an income property.
Capital Expenditures (CAPEX)
A capital expenditure when the asset is a newly purchased capital asset or an investment that improves the useful life of an existing capital asset. If an expense is a capital expenditure, it needs to be capitalized; this requires the company to spread the cost of the expenditure over the useful life of the asset. If, however, the expense is one that maintains the asset at its current condition, the cost is deducted fully in the year of the expense.
Capitalization Rate:
This is a ratio used to estimate the value of income producing properties. The cap rate is the net operating income divided by the sales price of the property expressed as a percentage.
Carve-outs:
These are specific items that a lender will require the borrower to personally guarantee for the life of the loan. Usually if this occurs, it is due to environmental issues, misappropriation of funds, theft and/or fraud. However, it is not limited to only those, it could be other reasons.
Certificate of Occupancy:
A certificate issued by a local building department to a builder or renovator, indicating that the building is in proper condition to be occupied.
Closing Costs:
These are fees and expenses, over and above the price of the property, incurred by the buyer and/or the seller in the property ownership transfer. Examples are title searches, lawyer’s fees, survey charges, and deed filing fees, also known as settlement costs.
Commercial Conduit:
Direct link to an institutional lending source.
Comparative Market Analysis:
An informal assessment of a property’s market value, usually done to establish a reasonable listing price when a property is placed for sale. The price is established by comparing the property to similar properties that have sold in the area within the past year.
Conduit:
The financial intermediary that sponsors the conduit between the lenders(s) originating loans and the investor.
Construction Loan:
A short-term, interim loan used for financing the cost of construction. The lender advanced these funds to the builder in periodic intervals as the work progresses.
Co-Signer:
Someone that is willing to sign a loan obligation with you in case you default on your monthly payments. They go through the same loan process as the original signer for approval.
Cost Approach:
A method of appraising real property where the cost of replacement of a structure is calculated using current costs of construction.
Credit Tenant:
A rating by S & P or Moody’s with a debt equity rating of BBB or better.
D
Debt Service:
The periodic payments (principal and interest) made on a loan.
Debt Service Coverage Ratio (DSCR):
This measures the ability of the borrower to cover the monthly payments. It is the ratio defined by taking the net operating income divided by the periodic payments (principal and interest) made on the loan. A 1.0 ratio means a breakeven. Most lenders look for a 1.25 or higher and the higher the ratio the better.
Dedicate:
To appropriate private property to public ownership for a public use.
Defeasance:
This is where the lender replaces the cash flow of the original loan with actual Treasury Securities.
Depreciation:
An expense recorded to allocate a tangible asset’s cost over its estimated useful life. Since it is a non-cash expense, it increases free cash flow while decreasing reported earnings.
Discount Rate:
The rate of interest charged to banks who borrow money from the Federal Reserve System.
Distraint:
A remedy for non-payment of rent. It involves the seizure of goods (chattels) belonging to the tenant by the landlord to sell them for the payment of the rent. The goods are held for five days and if the rent is not paid, they may be sold.
Due Diligence:
The performance of an investigation of a business or person, or the performance of an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations.
E
Earnest Money:
The monetary advance by a buyer of part of the purchase price to show the intention and ability of the buyer to carry the contract.
Economic Feasibility:
A building or project’s feasibility in terms of cost and revenue, with extra revenue establishing the degree of viability.
Effective Gross Income (EGI):
For income-producing property potential gross income less a vacancy and collection allowance, plus miscellaneous income.
Engineering Report:
A 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 the amount for calculating replacement reserves, if needed.
Environmental Report:
A report generated by a qualified environmental firm 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 less the amount of existing liens.
Escrow:
The account set up by the lender in which money is held to pay for the taxes and insurance. A third party carries out the instructions of both the buyer and the seller to handle the paperwork at closing.
Expense Ratio:
This is a comparison of the operating expenses to potential gross income.
F
Fair Market Value:
The price that an interested but not desperate buyer would be willing to pay and an interested but not desperate seller would be willing to accept on the open market assuming a reasonable period of time for an agreement to arise. An appraisal term for the price at which a property would bring in a competitive market. Farm: A tract of land cultivated for the purpose of agricultural production. A tract of land devoted to the raising and breeding of domestic animals.
First Generation Space:
New space that is currently available for lease and has never before had occupancy by a tenant.
Fixed Rate Loan:
A loan that has fixed payment and remains constant for the life of the loan.
Floating Rate Mortgage:
Please see “Adjustable Rate Mortgage.”
Floor-To-Area-Ratio:
The ratio of the gross square footage of a building to the land on which it is situated. FTAR is calculated by dividing the square footage in the building by the square footage of the land area.
Foreclosure:
This is the legal proceeding in which a bank or other secured creditor sells or repossesses a parcel of real property (immovable property) due to the owner’s failure to comply with an agreement between the lender and borrower called a “mortgage” or “deed of trust”. Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property.
Freestanding:
A commercial building occupied by one, single user.
Full Recourse:
A loan on which an endorser or guarantor is liable in the event of default by the borrower.
G
General Partner:
A member of a partnership who has the authority to bind the partnership. A general partner also shares in the profits and losses of the partnership.
Graduated Lease:
A lease that is generally long term in nature and provides that the rent will vary depending upon future contingencies. Those contingencies consist of things such as a periodic appraisal, the tenant’s gross income or simply just based on time.
Gross Income:
Total income before deducting taxes and expenses also, the scheduled (total) income, either actual or estimated, derived from the business or property.
Gross Lease:
A property lease in which the landlord agrees to pay all expenses which are normally associated with ownership, such as utilities, repairs, insurance, and (sometimes) taxes.
Grantee:
One to whom a grant is made.
Grantor:
Person making the grant.
Guarantor:
One who makes a guaranty.
Guaranty:
An agreement by which one person assumes the responsibility of assuring payment or fulfillment of another’s debts or obligations.
H
Hard Cost:
The actual cost of constructing the improvements of a building.
Highest & Best Use:
That possible use of land that will produce the greatest net income and thereby develop the highest land value.
High Rise:
A descriptive term for any building that has enough floors to make an elevator a necessity.
HVAC:
The acronym for “Heating, Ventilating and Air Conditioning.”
I
Index:
An economic indicator that is usually a published interest rate, that determines the changes in interest rate for adjustable rate loans. The index is added to the margin to derive the new interest rate.
Indirect Costs:
The expenses of doing business that are not readily identified with a particular construction project but are necessary for the general operation of the project. These costs include but are not limited to administrative and office expenses, commissions, architectural, engineering and financing costs.
Interest:
The sum paid for borrowing money, which in turn pays the lenders costs of doing business.
Interest Rate:
Expressed as a percentage and is the sum charged for borrowing money.
Interest Rate Cap:
A provision of an adjustable rate loan limiting how much interest rates may increase in a single adjustment period.
Investment Bank:
A lending institution that is both a direct lender as well as an intermediary.
J
Joint Venture:
A contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking. All parties agree to share in the profits and losses of the enterprise.
L
Lease Assignment:
An agreement between the commercial property owner and the lender that assigns the lease payments directly to the lender.
Leasehold Improvements:
The cost of improvements for a leased property. These improvements are often paid for by the tenant.
Lessee:
Tenant that occupies the building.
Letter Of Intent:
A written statement expressing the intention of the undersigned to enter into a formal agreement, especially a business arrangement or transaction.
Limited Liability Company:
LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Limited Partnership:
A statutory form of partnership consisting of one or more general partners who manage the business and are liable for its debts, and one or more limited partners who invest in the business and have limited personal liability.
Lock-Out Period:
A period of time after you get your loan that you cannot prepay it.
LTV:
Loan To Value: This is calculated by taking the loan amount and dividing it by the value.
M
Maker:
One who creates or executes a promissory not and promises to pay the note when it becomes due.
Margin:
The amount added to the index rate to determine the total interest rate.
Marketing Expenses:
Expensed that are accrued to market commercial properties.
Maturity:
The date on which a debt becomes due for payment.
Mezzanine:
Late stage venture capital financing.
Mini – Perm:
Short term financing that is usually for only 3-5 years.
Mixed-Use:
The combining of retail/commercial and/or service uses with residential or office use in the same building or on the same site.
N
Net Effective Rent:
Rental rate adjusted for lease concessions.
Net Operating Income (NOI):
Income after deducting for operating expenses but before deducting for income taxes and interest, tenant improvements and leasing commissions.
Net-Net Lease:
This is when the tenant pays for the property taxes, insurance, repairs, utilities and maintenance over and above the rent payment.
Non-Recourse:
A loan which bars a lender from seeking a deficiency judgment against a borrower in the event of default. The borrower is not personally liable if the value of the collateral for the loan falls below the amount required to repay the loan.
Notice Of Default:
A step in the foreclosure process in which the lender formally informs the court that the borrower is in late in payments.
O
Operating Expenses:
These are periodic expenses necessary to the operation and maintenance of a business (i.e. salaries, insurance and maintenance). This is often used to determine the basis for rent increases. A landlord’s definition of operating expenses is likely to be quite broad, covering most aspects of operating the building.
Origination:
Securing a commercial loan application by supplying all the appropriate documents and signing all the appropriate forms necessary to obtain a loan.
P
Percentage Lease:
A lease of property in which the rental is based on a percentage of the tenant’s sales made upon the lease premises. This is very common in malls.
Points:
Loan fees paid by the borrower. Each point is equal to 1% of the loan amount.
Potential Gross Rent:
This is the income from a building if it is completely rented.
Pre-payment Penalty:
A charge for paying off the loan before it comes due.
Prime Rate:
This is an artificial rate set by commercial lenders and the rate that banks give to their most creditworthy customers.
Pro-Forma:
Financial statements predicting what they expect to occur. (from Latin pro forma).
Property Classification:
Most lenders will classify a property by its age and needed maintenance. As an example, many insurance companies will only loan on properties that are class A, meaning that the property age is 10 years old or less and is not in need of repair.
Pro-Rata:
Proportionately, according to measure, interest or liability. In the case of a tenant, the proportionate share of expenses for the maintenance and operation of the property.
Q
Quit Claim Deed:
A deed which transfers whatever interest the maker of the deed may have in the particular parcel of land. A quitclaim deed is often given to clear the title when the grantor’s interest in a property is questionable. By accepting such a deed the buyer assumes all the risks. Such a deed makes no warranties as to the title, but simply transfers to the buyer whatever interest the grantor has.
R
Raw Land:
Unimproved land that remains in its natural state.
Raw Space:
Unimproved “shell space” in a building.
Recourse:
A loan in which the borrower is personally liable for payment if the borrower defaults.
Refinance:
The renewal of an existing loan by the same borrower.
Rentable Square Footage:
The floor space that may be rented to tenants in a building.
Rent Commencement Date:
The date on which a tenant begins paying rent.
Rent Roll:
This is a spread sheet describing the leases and occupancy of a building. It tells the tenant name, lease start date, lease end date, # of units, square footage, amount of rent and how long each tenant has been there.
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.
S
Sales Leaseback:
When a lender buys a property and leases it back to the seller for a specified period of time.
SBA Loan:
Small Business Administration Loan that is a federal government agency. SBA financing programs vary depending on a borrower’s needs. SBA-guaranteed loans are made by a private lender and guaranteed up to 80 percent by the SBA, which helps reduce the lender’s risk and helps the lender provide financing that’s otherwise unavailable at reasonable terms.
Setback:
The distance from the curb, property line or other reference point within which building is prohibited.
Shadow Anchored:
An unanchored shopping center that is located near an anchored shopping center.
Shell Space:
The interior condition of the tenant’s usable square footage when it is without improvements or finishes.
Soft Cost:
The portion of an equity investment other than the actual cost of the improvements themselves (i.e. commissions, engineering fees, architectural etc.) and which may be tax-deductible in the first year.
Strip Center:
A shopping area usually comprised of a row of stores, generally with common parking.
Survey:
An process that specifies precise property boundaries. It is useful in determining if boundary violations (encroachments) exist.
T
Tenant:
The person that is given possession of real estate for a fixed period or at will.
Title Insurance:
An insurance policy that insures you against errors in the title search essentially guaranteeing you, and your lender’s financial interest in the property.
Total Annual Operating Income:
Total yearly income less operating expenses, adjustments, etc. but before the payments and leasing commissions.
Triple Net Lease:
A lease in which the lessee pays rent to the lessor as well as all taxes, insurance, and maintenance expenses that arise from the use of the property.
U
Unanchored:
A tenant in a shopping center that does not have an anchored tenant.
Underwriting:
The process of determining if a loan should be made, based on property cash flow, credit and other factors.
Upfront Fees:
Generally refer to fees charged to pay for and cover third party costs such as appraisals.
Use:
The specific purpose for which a parcel of land or a building is intended to be used or for which it has been designed or arranged.
Usable Square Footage:
Usable square footage is the area contained within the demising walls of the tenant space.
V
Vacancy Rate:
The total amount of available space compared to the total inventory of space and expressed as a percentage. This is calculated by multiplying the vacant space times 100 then dividing it by the total inventory.
Variance:
Permission that allows a property owner to depart from the literal requirements of a zoning ordinance, that because of special circumstances, cause a unique hardship.
W
Warranty of Possession:
This is the old “quiet enjoyment” paragraph which of course had nothing to do with noise in and around the leased premises. It provides a warranty by the Landlord that it has the legal ability to convey the possession of the premises to the Tenant; the Landlord does warrant that he owns the land. In other words, if the landlord breaches this warranty, it constitutes an actual or constructive eviction.
Z
Zoning:
The division of a city or town into zones and the application of regulations having to do with the structural, architectural design and intended use of buildings with such designated zone.
Zoning Ordinance:
An exercise of police power by a municipality to regulate and control the character and use of property.
