Unit of land measure equal to 43,560
Amortization (To Amortize):
The act of paying off a debt through scheduled
periodic payments. Example: A 20 year amortization means that the
payments are evenly distributed monthly over the course of 20 years,
so that the final payment on the last month of the 20th year will
have paid the entire principal balance of the loan.
A document prepared by a professional, licensed
appraiser that determines the monetary value of commercial real estate.
Most commercial appraisals have three approaches to determining the
value of a property. These three approaches are:
cost approach and fair market value.
An appraisal of the subject property is needed on all commercial real
estate loans with AARCS Financial Group.
A loan that is capable of being transferred to
a new borrower with no change in rate or terms of the loan. It also
allows a borrower to sell a property and avoid paying a
prepayment penalty because the loan is being
transferred and not paid off.
ADR (Average Daily Rate):
A unit of statistics used to determine a hotel
or motel's pricing scale. The statistic is determined by dividing the
room revenue by the total number of rooms sold.
A loan with a termshorter
than its amortization therefore requiring a
final loan payment significantly larger than the payments preceding.
Basis Point (BP):
A basis point is 1/100th of 1%. Example: 25 basis
points is equal to 0.25%.
Short term financing designed to be paid off after
a designated period of time. A common form of bridge loans is
(Common Area Maintenance):
Common Area Maintenance describes the act of
maintaining areas which are used by one or more of the tenants in a
building or their customers. Common areas can be as simple as a picnic
table in the quad of an office complex to the entire interior corridor
of a shopping mall and the parking lot. Many times these expenses are
passed on to the tenants as part of their base rent or as a direct
expense of a tenant in a triple net lease
Cap Rate: Capitalization Rate:
A capitalization rate is used to measure how
quickly an investment will pay for itself based on the income that it
produces. The Cap Rate is calculated by dividing
the Net Operating Income (NOI) by
the purchase price of the property. If the purchase price of the
property is $1,000,000 and the most recent annual NOI
for that property is $120,000 then (120,000/1,000,000 = 0.12 or 12%) the
property has a Cap Rate of 12%. The property could pay for itself in
8.33 years (100/12 = 8.33).
Cash flow is a measure of financial strength for
a company. Cash flow is equal to cash receipts minus cash payments over
a certain period of time. In order to determine the cash flow of a
business based on tax returns, non-cash expenses such as depreciation
and amortization are added to the net income. Cash flow is used by
lenders to determine the amount of cash available to service the debt
of a loan. Cash flow is used to derive the DCR
(Debt Coverage Ratio) of a business.
Any fees or costs that are incorporated into the
transfer of real property applied at the closing of a loan (not
including the cost of the actual property).
A loan where the funds are used for ground-up
construction, renovation or expansion of a building on real property.
Generally construction loans are short term loans designed to be taken
out by permanent financing. The Construction
Loan Program with AARCS Financial Group includes the construction loan
and permanent financing in a single closing.
Any condition of a contract that must be satisfied
before the contract can be consummated.
Cost Approach to Value:
The cost approach in determining the value of a
property is simply determining how much it would cost to construct the
permanent improvements at the subject property plus the cost of the
Credit tenants are tenants that are usually publicly
traded or large private entities with a strong S&P rating.
DCR (DSCR), Debt
Coverage Ratio (Debt Service Coverage Ratio):
DCR is a calculation that banks use to determine
the capability of a income producing property or business to pay its
debt obligations. DCR is calculated by dividing the Net
Operating Income(NOI) by the annual debt payments.
Example: NOI= $120,000. Annual debt payments= $100,000.
$120,000/$100,000 = 1.20. This means that the property or business would
have a DCR of 1.20x or 120% of the annual principal and interest cost of
their debt. A DCR below 1 would mean that the property or business is not
producing enough income to meet its debt obligations or proposed debt
The Federal Reserve Board defines the discount rate
as "...the interest rate charged to commercial banks and other
depository institutions on loans they receive from their regional Federal
Reserve Bank's lending facility..."
When a borrower does not meet his/her obligation to
pay their debt as prescribed in the loan documents, their loan is in default.
When a loan is in default, if not made current, the property secured by the
mortgage is in danger of being foreclosed upon.
Depreciation is an accounting method that provides a way
for businesses to expense assets over time, rather than only at the time that
they purchased it. Depreciation is a non-cash expense, letting businesses
report lower earnings, but higher Net Operating Income and
DTI (Debt to Income Ratio):
The debt to income ratio is used to determine the
percentage of gross monthly income going to pay debts. The calculation used
to determine DTI is monthly debt payments divided by gross monthly income. For
example: If someone makes $10,000 per month and their debt payments (including
mortgages, credit cards, car payments, etc.) total $3,000 per month, then they
have a debt to income ratio of 30% (3,000/10,000 =0.30 or 30%). That is to say
that 30% of their gross personal income goes to pay debt. Although DTI does
play a role in qualifying a commercial loan, DCR plays a
much more important role in commercial lending than does DTI.
Many banks and lenders require a subject property to be
proven environmentally clean prior to committing to fund a loan with the
subject property as collateral. This report discusses the actual or potential
environmental hazards related to the property.
The monetary value of a property beyond the amount
Escrow is a third party that will hold funds in trust
until all contingencies are fulfilled and then will distribute the funds
according to the instructions of the parties involved.
Fair Market Value:
The US Supreme Court defines Fair Market Value as
"...the price at which the property would change hands between a willing
buyer and a willing seller, neither being under any compulsion to buy or to
sell and both having reasonable knowledge of relevant facts."
Federal Funds Rate (Fed Funds Rate):
The Fed Funds rate is the rate at which banks lend to each
other for overnight money. It is the interest rate on which the
Prime Rate Index is based. The nominal Federal
Funds Rate is controlled by the Board of Governors of the Federal Reserve.
FF&E(Furniture, Fixtures and Equipment):
FF&E or Furniture, Fixtures and Equipment is a
term used to describe the non-permanent assets that are necessary to perform
the business being operated on the property. For example: FF&E for a
restaurant would include stoves, ovens, tables, booths, chairs, light
fixtures, etc. Sometimes the FF&E of a property can be financed,
especially when using SBA financing.
Foreclosure is the legal process of seizing the
collateral that secured a loan that has been
Fully Amortizing Loan:
that has an amortization schedule the same
length as its term. It is a loan that has no balloon
A unit of land measure equal to 2.47
acres or 107,639 square feet.
A property designed for the specific purpose of providing guests with
overnight accommodations. Hospitality properties include: hotel properties,
motel properties, and bed and breakfast properties.
Income Approach to Value:
Also known as the "Income Capitalization
Approach," is a method appraisers use to determine the value of
commercial real estate based on income derived from the property. The
value is determined using capitalization rates
of the net operating income.
An economic indicator in the form of an
interest rate on which other interest rates
are based. Examples: The Wall Street Journal Prime Rate, The Federal Home
Loan Bank (FHLB) of Seattle indices, Treasury SWAP indices.
The percentage of a sum of money that is charged by
a lender to a borrower for the use of said sum.
A loan where the borrowers pay interest on the
principal balance and no amount of the payment goes
towards reducing the principal balance.
A contract renting land and/or buildings to another.
A lease identifies the amount of rent to be paid, the responsibilities
of both the property owner (lessor) and lessee (
tenant), and sets a start and expiration date.
Limited Service (Hotel):
A hotel that offers only lodging services and
does not offer special services such as a full scale restaurant or a spa.
Many limited services hotels offer a free continental breakfast to
guests and some have a pool and small gym.
LTV (Loan to Value Ratio):
LTV is a ratio expressed as a percentage and is the
calculation of debt over equity. It is used to
express the amount of debt owed on real property as a percentage of its
total appraised value. For example, if someone wishes to purchase a
property for $1,000,000 and they have $250,000 cash to put down on the
property, they would need a loan of $750,000 to complete the purchase.
The loan ($750,000) to value ($1,000,000) ratio is 75%
(750,000/1,000,000 = 0.75).
The period following the closing of a loan in
which the loan may not be prepaid.
Mixed Use Property:
A mixed use property is a property that has both
residential and commercial uses. A typical example of this would be a
building with one or more office or retail units on the first floor
and one or more apartments above.
Multi-family property is a property that can
house more than one family; an apartment building.
A multi-use property is a property that can
easily be converted for multiple purposes. Examples of multi-use
property are: office, retail warehouse, light industrial, and general
The gross annual income of a property minus its
operating expenses. AARCS Financial Group uses the NOI of a property
to determine the debt serviceability of said property. The NOI of a
property is used to determine the DSCR of a property.
See here for more info on NOI.
Origination is the process of pre-screening,
Prequalification, due diligence, underwriting and
funding/recording. An Origination fee is the fee for this service.
As opposed to a bridge loan
or construction financing, permanent
financing is the long term financing of commercial real estate.
Permanent financing usually has a term longer than 10 years and has an
amortization schedule of at least 15 years. With MONB you will typically
find loans with terms and amortization schedules of 20 or 25 years.
Pre-leased it a term used when a landlord leases
property to tenants before the construction of the property is completed.
Sometimes borrowers need to pre-lease a portion of their property in order
to qualify for a commercial construction
A prepayment penalty is a fee charged to a borrower
if he/she pays off their loan prior to the end of the prepayment penalty
term. Sometimes these penalties are based on a percentage of the amount
prepaid, and sometimes they are based on the amount that the borrower
would have paid in interest payments had the note not been prepaid. A
prepayment penalty is not a lock-out.
Prime Rate -
The Prime Rate is defined as the interest rate
charged by banks to their most creditworthy borrowers. The Prime Rate
varies little throughout the country. The most commonly accepted publisher
of the Prime Rate is the Wall Street Journal. That is why the index is
often referred to as the Wall Street Journal Prime Rate (WSJ Prime Rate).
Although the Board of Governors of the Federal Reserve does not directly
control the Prime rate, the open market generally calculates the Prime
Rate to be the Fed Funds Rate + 3.00%.
Principal refers to the outstanding debt of an
entity without including interest costs.
Profit and Loss Statement:
A statement that details the income and expense
for a business or commercial real estate for a given period.
Proforma, when translated form Latin, literally
means “matter of form.” In commercial real estate financing it simply
means projected or expected and usually refers to income, expense, or
Recourse refers to a lender's ability to hold a
personal guarantor personally liable for a loan. There are some
commercial loan programs available that do not require a personal
guarantor and thus are "non-recourse."
To replace securitized debt with new debt,
secured by the same collateral.
A list of tenants in a commercial or multi-family
property that includes some detail of the lease agreement between
tenant and landlord (i.e. tenant name, base rent, length of contract,
area or unit description).
SBA (U.S. Small
The U.S. Small Business Administration (SBA)
was created in 1953 as an independent agency of the federal government
to aid, counsel, assist and protect the interests of small business
concerns, to preserve free competitive enterprise and to maintain and
strengthen the overall economy of our nation. We recognize that small
business is critical to our economic recovery and strength, to building
America's future, and to helping the United States compete in today's
global marketplace. Although SBA has grown and evolved in the years
since it was established in 1953, the bottom line mission remains the
same. The SBA helps Americans start, build and grow businesses. Through
an extensive network of field offices and partnerships with public and
private organizations, SBA delivers its services to people throughout
the United States, Puerto Rico, the U. S. Virgin Islands and Guam.
Second Trust Deed (Second Mortgage):
A second trust deed (also written 2nd TD) or a
second mortgage (also referred to simply as "a second") is
a loan in a subordinate position to a first trust deed loan secured
by the same collateral.
Special Use Property:
A commercial property type that cannot be easily
converted into many different uses. Examples of Special Use Property
are: gas stations, most restaurants, automotive service facilities,
assisted living facilities, marinas, carwashes and hospitality
A unit of measure usually used to describe the
size of a building or lot of land smaller than one
acre. A square foot is the area of a square with sides equal to
one foot in length. Also equal to 144 square inches.
A tenant occupies and uses a property according
to terms outlined in a lease or rental agreement
signed by both tenant and landlord.
The term of a loan identifies how many years
until full repayment is required.
The legal document that provides evidence of
ownership of a piece of real estate.
Triple Net Lease (NNN Lease):
(Also referred to as Net-Net-Net). A triple
net lease is a lease agreement where the tenant
pays all real estate taxes, property insurance, common operating
expenses (utilities) and Common Area Maintenance
(CAM) in addition to the base rent.
Unanchored usually refers to small, retail
centers with no major credit tenant in
the center. Major credit tenants are
usually very large regional, national or international companies.
The process of due diligence performed by a
lender in preparation of final approval to fund a loan.
A vacancy is an unoccupied unit in a commercial
or multi-family building.
The percentage of available rentable space
that is not occupied by a tenant.
A type of prepayment penalty designed to allow
investors to attain a similar yield as if the borrower made all
scheduled mortgage payments until maturity.