Bankruptcy. A special proceeding under federal, or in some instances state, laws by which the property of a debtor is protected by the court and may be divided among the debtor's creditors and the debtor.

Bridge Loan. A loan which enables a buyer to purchase a property, then allow for time to rehab and/or increase NOI prior to placement of permanent financing or enables buyer to get financing to make a down payment and pay closing costs before selling the present property. Also called “gap” financing.

Building Owners & Managers Association (BOMA). An organization of practitioners who own and manage buildings, most often office space. Sets the basis by which most regional expense standards are established. Address: Building Owners and Managers Association 1221 Massachusetts Avenue NW Washington, DC 20005.

Carve-outs. Specific items that a Lender will require the Borrower to personally guarantee for the life of the loan. Typically include (but are not limited to) environmental, fraud, misappropriation of funds, and theft.

Closing Costs. Various fees and expenses payable by the seller and buyer at the time of a real estate closing, (also termed transaction costs). Includes brokerage commissions, lender fees, title insurance, recording fees, prepayment penalty, inspection and appraisal fees, and attorney’s fees.
Commercial Bank. A financial institution authorized to provide a variety of financial services, including consumer and business loans (generally short-term with full recourse to the Borrower). Commercial banks may be members of the Federal Reserve System.

Commitment Fee. A charge required by a lender to lock in specific terms on a loan at the time of Commitment.
Commitment Letter. An official notification from a Lender to a Borrower indicating that the Borrower's loan application has been approved. It will state in detail the terms and conditions of the prospective loan.
Common Area Maintenance (CAM). Operational expenses related to the maintenance of retail and office properties. Under a Triple-Net lease the Tenant is required to reimburse the Landlord for their proportionate amount (based on square footage) of this expense.

Conduit. An entity which issues mortgage- backed securities backed by mortgages which were originated by other lenders.

Constant. Percentage of the original loan paid in equal annual payments that provides principal reduction and interest payments over the life of the loan.

Construction Loan. A short-term, interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as work progresses. Typically a recourse loan to the borrower.

Consumer Price Index. The most widely known measures of price levels and inflation that are reported to the U.S. government. It measures and compares, on a monthly basis, the total cost of a statistically determined "typical market basket" of goods and services consumed by U.S. households.
Correspondent. A specialized type of mortgage banker whose function is limited to the origination of mortgage loans which are sold to other mortgage bankers or investment bankers under a specific commitment.

Cost Approach. A method of appraising property based on the depreciated reproduction or replacement cost (new) of improvements, plus the market value of the site.

Credit Rating (Report). An evaluation of a person's capacity (or history) of debt repayment. Generally available for individuals from a local retail credit association; for publicly held companies by such firms as Dunn & Bradstreet; and for bonds by such firms as Moody's, Standard & Poor’s, and Fitch's.

Cross-Collateralization. Net income shortfalls on one property are offset by excess cash flow from other properties in a pool of “crossed” loans. Significantly enhances a transaction from the viewpoint of investors and rating agencies.

Current Yield. A measurement of investment returns based on the percentage relationship of annual cash income to the investment cost.

Debt Service. The periodic payment (monthly, quarterly, or annually) necessary to pay the interest and principal on a loan which is being amortized over a longer term (usually 25-30 years).

Deed of Trust. The deed to real property which serves the same purpose as a mortgage but instead of two parties, three parties are involved. The third party holds title for the benefit of the Lender. The Lender is called the “Beneficiary”. The Borrower is called the “Trustor”. When a loan is made, the Borrower conveys title to a third party called the “Trustee” who holds the title for the benefit of the Lender although the instrument itself may remain in the Lender's possession.
Delegated Underwriting and Servicing (DUS). Fannie Mae's principal line for purchasing individual multifamily loans. We delegate the processing and approval of the loans to our DUS Lenders, and they take a percentage of the risk.

Defeasance. In defeasance, the lender replaces the cash flows of the original loan with actual Treasury Securities. The borrower pays the lender enough money to buy these securities and the lender goes out in the bond market and buys the right combination of bonds. After this is done, and the lender has a security interest in the treasuries, the property is released as collateral for the loan and the treasuries become the new loan collateral.
Demand Note. A note having no date for repayment, but due on demand of the lender.

Discount Rate. The rate of interest charged to banks who buy money from the Federal Reserve System. An increase in the rate not only discourages the banks from borrowing, but it also serves as a signal that interest rates are probably going to increase. Also, a compound interest rate used to convert expected future income into a present value income.

Equity Participation. The right of a Lender to a share in the gross profits, net profits or net proceeds in the event of a sale or refinance of a property on which the Lender has made a loan. Also known as an “equity kicker.”

Eminent Domain. The right of a government to take privately owned property for public purposes under condemnation proceedings upon payment of its reasonable value. See Condemnation.

Encroachment. The presence of an improvement such as a building, a wall, a fence or other fixture which overlaps onto the property of an adjoining owner.

Encumbrance. A right or claim upon real property (land) held by one other than the property owner. Encumbrances are divided into two classes, as follows:

a) Liens (mortgages, deeds of trust, mechanics' liens, local taxes, assessments, judgments, attachments, etc.).

b) Encumbrances other than liens which are limitations on the ownership of the land (such as conditions, restrictions, reservations, easements, etc.).

Endorsement. Addition to or modification of a title insurance policy which expands or changes coverage of the policy, fulfilling specific requirements of the insured.

Equity.
(1) A legal doctrine based on fairness, rather than strict interpretation of the letter of the law.
(2) The market value of real property, less the amount of existing liens.
(3) Any ownership investment (stocks, real estate, etc.) as opposed to investing as a lender (bonds, mortgages, etc.).

Estoppel Certificate. A document by which a tenant certifies to a Lender that all rental amounts due and owing are current, and that the Landlord is in compliance with all terms and conditions of the Lease. Also, a document by which the mortgagor (borrower) certifies that the mortgage debt is a lien for the amount stated. The debtor is thereafter prevented from claiming that the balance due differs from the amount stated.
Expense Ratio. A comparison of the operating expenses to potential gross income. This ratio can be compared over time and with that of other properties to determine the relative operating efficiency of the property considered.

First Mortgage. A lien on property in which the lender’s claims are superior to the rights of subsequent lenders. Certain lenders only make first mortgages due to regulatory requirements; others limit mortgages to these senior instruments due to company policy.
Fixed Expenses. Expenditures such as property taxes, license fees, and property insurance that are not directly affected, by the occupancy of the property. Fixed expenses along with operating expenses are subtracted from effective gross income to determine the net operating income of property.
Forward Commitment. An agreement between a permanent lender and an interim (typically construction) lender wherein the permanent lender issues a conditional commitment that will replace the construction loan once a given set of terms and conditions have been achieved.

Fully Amortized Mortgage (Loan). A loan that is fully repaid at maturity by periodic (monthly) reductions of the principal. The first part of each monthly payment covers interest on the outstanding debt as of the payment due date and the remainder of the payment goes to reduce the outstanding debt.

Interim Financing. A loan, including a construction loan, used when the property owner is unable or unwilling to arrange permanent financing. Generally arranged for less than 3 years, used to gain time for operations and or market conditions to improve.
Index. A published interest rate, such as prime rate, LIBOR, T-Bill rate or the 11th District COF. Lenders use indexes to establish interest rates charged o mortgages or to compare investment returns.

Ingress and Egress. Applied to easements, meaning the right to go in and out over a piece of property but not the right to park on it.

Internal Rate of Return. (IRR) The true annual rate of earnings on an investment. Equates the value of cash invested with cash returns. Considers the application of compound interest factors. Requires a trial-and-error method for solution.

Lease Abstract. A detailed recap of office and retail leases including tenant name, suite #, square footage, current rental rate including increases, lease start date, term, CAM requirements, extension options and rates.

Leasing Commission (Reserve) Escrow. The annual cost related to the leasing and releasing of commercial office and retail space. The amount deducted from the Net Operating Income prior to determining the net cash flow available for debt service coverage.

Legal Description. A description of land recognized by law, based on government surveys, spelling out the exact boundaries of the entire piece of land. It should so thoroughly identify a parcel of land that it cannot be confused with any other.

Lessee. An individual or entity to whom property is rented under a lease. A tenant.

Lessor. An individual or other entity - one who rents property to another under a lease. A landlord.

Letter of Credit. An arrangement, with specified conditions, whereby a bank agrees to substitute its credit for a customer's.

Leveraged Buy-out. The acquisition of a company, financed primarily with borrowed money, using the acquired company’s assets to collateralize the loan.

LIBOR (London Interbank Offered Rate). The rate that international banks dealing in Eurodollars charge each other for large loans. Some domestic banks and other lenders use this rate as an index for adjustable rate mortgages. The LIBOR rate quoted in the Wall Street Journal is an average of rate quotes from five major banks. Bank of America, Barclays, Bank of Tokyo, Deutsche Bank and Swiss Bank.

Limited Partnership. Arrangement in which there is at least one partner whose liability extends beyond monetary investment and at least one partner who is passive and limits liability to the amount invested.

Loan Application Fee. A charge required by a lender or loan originator to be paid by the borrower to cover the credit report, property appraisal and other incidental expenses associated with underwriting the loan. The fee is generally not refundable.
Loan-To-Value Ratio (LTV). The amount of money borrowed compared to the cost or value (appraised or sale price) of the real property purchased.

Lock-Box. Rental income is delivered to a trustee (or servicer), who then pays expenses and makes the loan payment, before excess cash is released to the borrower. The lock-box removes borrower discretion and control over funds.

Locked-in Interest Rate. The rate promised by a lender at the time of loan application or commitment. On income property loans, a lock-in generally requires a commitment fee or rate lock fee from the loan applicant.

Management Fee. The amount charged by an independent company for the day-to-day management of a property. Typically based upon a percentage of the property’s income.

Market Approach. A method of appraising property by analyzing sales prices of similar properties (comparables) recently sold.

Market and Feasibility Study. A. detailed analysis of activities in a market in regard to such influences as location, demand and competition which may or may not affect the value of property. Includes an analysis of a real estate project to determine the most profitable use and the likelihood of the proposed use being a financial success. The study is often used by the promoter or developer to inure would-be investors to participate in the venture and to assist lenders in making their decision whether or not to loan the necessary funds.

Market Rent. The rental income that a property is likely to command in the under current market conditions. Market rent, also referred to as economic rent, may be either higher or lower than what the property is actually renting for under the terms of a lease.

Mechanics Lien. A lien created by statute for the purpose of securing priority of payment for the price or value of work performed and materials furnished in construction or repair of improvements to land, and which attaches to the land as well as the improvements.

Mixed-Use Commercial Project. A real estate development that contains two or more different uses all intended to be harmonious and complementary. An example would include a high-rise building with retail shops on the first two floors, office space on floors three through ten, apartments on the next ten floors, and a restaurant on the top floor.

Mortgage. (1) To hypothecate as security, real property for the payment of a debt. The borrower (mortgagor) retains possession and use of the property. (2) The instrument by which real estate is hypothecated as security for the repayment of a loan.

Mortgage-Backed Securities. Securities purchased by investors that are secured by mortgages. Such securities are also known as pass-through securities since the debt service paid by the borrower is passed through to the purchaser of the security.

Mortgage Banker. A financial middleman who, in addition to bringing borrower and lender together, makes loans, packages them, and sells the packages to both primary and secondary investors. Usually the mortgage banker continues to service the loan (collect debt service, pay property taxes, handle delinquent accounts, etc.) even after the loan has been packaged and sold. For this management service a small percentage of the balance paid to the investor goes to the mortgage banker. Quite often the loan origination fee or finder's fee charged the borrower is more than offset by a lower interest rate from a lender not directly accessible to the borrower. As with mortgage brokers, mortgage bankers are regulated by state laws.

Mortgage Bankers Association of America (MBA). The Mortgage Bankers Association of America is the primary trade organization of the mortgage bankers and brokers in the United States. The association provides numerous seminars and publications for its membership and sponsors the designation CMB (Certified Mortgage Banker). The headquarters is 1125 15th Street, N.W., Washington, D.C. 20005; (202) 861-6500.

Mortgage Broker. A person who brings together borrower and a lender and in return is paid a finder's fee. This finder's fee is usually equal to one percent or so of the amount borrowed is normally paid by the borrower. Certain sources of funds, particularly insurance companies, do not always deal directly with the person looking for capital; rather, they work through a mortgage broker. Normally, the mortgage broker is not involved in servicing the loan once it is made and the transaction is closed.

Mortgage Constant. The relationship between annual mortgage loan requirements and the initial mortgage loan principal, expressed as a decimal or percentage, for level-payment mortgage loans. Used for converting debt service into mortgage loan value.
Mortgage Correspondent. A person authorized to represent a financial institution in a particular geographic area for the purpose of placing loans.

Mortgage Securities Pool. A method by which securities backed by the value of specific real estate mortgages are issued in the financial market for investment purposes. Such securities, because they are mortgage-backed, are more marketable and generally are issued with a lower rate of interest than if no such backing existed.

Operating Expenses. Periodic expenses (usually monthly) of operating income-producing property other than debt service and income taxes. Operating expenses are those directly related to the level of occupancy and usage of the building. These can include management fees, maintenance, ground maintenance, utilities, supplies, legal fees, accounting fees, and other such costs. These expenses are subtracted from gross income to equal the net operating income.
Operations and Maintenance Plan (O&M). A written plan detailing the removal of potentially environmental sensitive materials.

Origination Fee. The amount charged by a lender to cover the time and expenses incurred in arranging a loan. This fee covers such expenses as credit checks, and appraisal of the property. Normally the origination fee is stated as a percentage of the loan amount; for example, one percent.

Phase I Environmental Report. A comprehensive report
required by most Lenders and produced by an independent company that details the current environmental condition of a property. Typically requires a historical review of the property’s previous uses and may require a operations and maintenance (O&M) plan for the future removal of asbestos and other harmful items.

Physical Condition Report. A comprehensive report required by most Lenders and produced by an independent company that details the current physical condition of a property. Typically includes specific items that require immediate repair as well as those items that should be replaced over the life of the loan. Basis used to establish the annual Replacement Reserve Escrow for the property.

Potential Gross Income. The amount of income that could be potentially be produced by a real estate property assuming there are no vacancies or collection losses. Does not include miscellaneous or other income.

Power of Attorney. A document by which one person (called the "principal") authorizes another person (called the "attorney-in- fact") to act for him/her in a specific manner in designated transactions.

"Prelim" or Preliminary Report. A written report issued by a title company, preliminary to issuing title insurance, which shows the recorded condition of title of the property in question. See Commitment.

Prime Rate. The lowest commercial interest rate charged by banks on short-term loans to their most credit-worthy customers. The prime rate is not the same as the long-term mortgage rate, though it may influence long-term rates. Mortgage rates are generally higher than the prime rate, but exceptions occur at times.
Pro-forma. A financial or accounting statement using estimates and assumptions to project income and the performance of real property over a period of time.

Principal & Interest Payments (P&I). A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to amortization of the principal balance. Commonly used with amortizing loans.

Public Domain. Land owned by the government and belonging to the community at large.

Reconveyance. An instrument used to transfer title from a trustee to the equitable owner of real estate, when title is held as collateral security for a debt. Most commonly used upon payment in full of a trust deed. Also called a deed of reconveyance or release.

Recourse. The ability of a lender to recover money from a borrower in default, in addition to the property pledged as collateral.

Rehabilitation Tax Credit. The Tax Reform Act of 1986 provides a 20% tax credit for rehabilitating certified historic structures, and a 10% credit for other buildings that were placed in service after 1936.

Replacement Reserve. Various account(s) maintained (typically by the Lender) to provide funds for anticipated expenditures required to maintain a building. A reserve account usually is required by a lender in the form of an escrow to pay upcoming taxes and insurance costs. A replacement reserve may be maintained to provide for replacement cost of short-lived components, such as carpets, heating equipment or roofing. Also, a tenant improvement and leasing commission account may be required for future changes in tenancy.

Reinsurance. A contract which one insurer makes with another to protect the first insurer, wholly or partially, against loss or liability by reason of a risk under a separate and distinct contract as insurer of a third party. Reinsurance differs from coinsurance in that, in the case of reinsurance, only one insurer has a direct contractual relationship with the insured, and that insurer (commonly referred to as the "lead insurer") purchases reinsurance in order to lessen or spread the risk. The "lead insurer" will assume a risk up to a limit (the amount of which is referred to as the "retention") and any loss which exceeds this limit would be borne by the reinsurers. In the case of coinsurance, each coinsurer has a direct contractual relationship with the insured, and the risk is shared in agreed-upon proportions from the first dollar of loss.

Reserve Agreement. The Delegated Underwriting and Servicing Reserve Agreement. This is a contractual agreement among Fannie Mae, the custodian, and the lender, in which the lender agrees to establish a lender reserve and to pledge collateral to Fannie Mae to secure the lender's obligations under Delegated Underwriting and Servicing. The Reserve Agreement also gives Fannie Mae contractual rights in the pledged reserve and provides Fannie Mae certain contract remedies to enforce the reserve requirements.

REVPAR (Revenue per Room). Calculation is in underwriting (usually hotels) where the gross income is divided by the total number of rooms available (both occupied and unoccupied).

Right of Way. (1) The right to pass over property owned by another, usually based upon an easement. (2) A path or thoroughfare over which passage is made. (3) A strip of land over which facilities such as highways, railroads or power lines are built.

Sales Comparison Approach. A method of estimating the value of real property by comparing recent sales of comparable properties to the subject property after making appropriate adjustments for any differences. The comparable properties chosen should be substantially similar to the subject property and should be arms-length transactions.

Secondary Mortgage Market. The means by which existing first mortgages are bought and sold. The secondary mortgage market provides a lender with an opportunity to sell a loan before its maturity date, thereby providing greater availability of funds for additional mortgage lending.

Self-Amortizing Loan. A mortgage loan that requires level annual payments sufficient to meet the interest requirements and fully repay the entire principal over its term.
Separate Property. Real property owned by one spouse exclusive of any interest of the other spouse.

Servicing Fee. The periodic (monthly or annual) payment made by the purchaser of a mortgage (Lender) to the mortgage banker (correspondent) who originally made the loan for servicing the loan. The fee, which varies from one-eight to one-half percent of the outstanding loan balance, covers the administrative costs of servicing such as collection and payment of property taxes and property insurance premiums. Servicing rights may be bought and sold along with the loan.
Spread. The difference between the rate at which money can be borrowed and the rate at which it is loaned. Typically the rate (percentage amount) that is added to the Treasury Bill by a Lender when quoting a rate to a borrower.

Stabilized. Term associated with the operation of a property wherein the income and expenses have achieved and maintained a consistent level of performance. The minimum is usually established when the property has performed at specific minimum for ninety (90) days.

Subordinated Ground Lease. A land (ground) lease in which the rent payment due from the lessee (borrower) to the lessor (land owner) is subordinated to the debt service owed by the lessee (borrower) to the mortgagee (lender). Normally, a ground lease contains a subordination clause because without it, construction of improvements may be more difficult. A mortgage lender will consider the full value of the property only with a subordinated ground lease.

Survey. The process by which the precise physical boundaries of a parcel of land are measured. Legal descriptions appear in title reports, sales contracts, deeds, mortgages, notes, and other instruments involving rights and interests in real estate. When land is conveyed from one party to another, the survey provides a visual representation of the legal description. An ALTA survey additionally delineates the exact location of all improvements, encroachments, easements and other matters affecting the title to the property in question. A survey may be required by a title insurance company whenever the company is requested to issue an ALTA Extended Coverage Policy.

Swap Spread. The exchange of one asset or liability for a similiar asset or liability to lengthen or shorten maturities, also raise or lower coupon rates, or exchange fixed and variable payment streams.

U.S. Treasuries. Only treasuries with an original term of 30 years are Bonds. All treasuries with original terms of 2-10 years are Notes. Everything shorter than two years are Bills.

Vesting. The names, status and manner in which title of ownership is held with a fixed or determinable interest in a particular parcel of real property; also that portion of a title report or policy setting forth the above.