Commercial Real Estate Leases: Understanding Gross, Double Net, and Triple Net Leases
1031 Exchanges in Commercial Real Estate
A 1031 exchange allows a commercial property seller to defer taxes from the sale of a property if they acquire another, similar property within 180 days.
TI/LC: Tenant Improvements / Leasing Commission In Commercial Real Estate
A tenant improvement, or TI, refers to the improvements a commercial property owner makes to the interior of a rental space in order to suit the needs of a new tenant. A leasing commission, or LC, is an amount paid by the owner of the property based on a percentage of the lease value.
Prime Interest Rate in Commercial Property Loans
The prime interest rate is the interest rate banks charge their most favored customers. It is based on the federal funds rate.
LTV: Loan To Value Ratio In Commercial Real Estate Loans
The loan-to-value ratio, or LTV, is a measure of the relationship between the loan amount and the value of the commercial real estate (collateral). It is used to measure, or determine risk when financing commercial property or making a commercial mortgage.
LTC: Loan to Cost Ratio In Commercial Real Estate Loans
The loan-to-cost ratio, or LTC, is used in commercial real estate to calculate the percentage a construction or rehabilitation project's loan amount represents relative to the total project cost.
LIBOR: London Interbank Offered Rate
The London Interbank Offered Rate, or LIBOR, is the interest rate central banks in London are charged for short-term borrowing.
Special Purpose Entities in Commercial Real Estate
A special purpose entity or single purpose entity (SPE) is a legal entity used to acquire and finance a specific investment while limiting risk for all parties involved.
Rent Ceiling in Commercial Real Estate
A rent ceiling is the highest price that a landlord can charge for rent. In most cases, rent ceilings apply to multifamily properties and are a result of city and/or state rent control regulations. A rent ceiling is only effective if it actually sets rents below the current market rate. While rent ceilings are supposed to make properties more affordable for residents in a specific area, in practice, this isn’t always the result, especially due to increased “black market” costs in the form of key fees and additional rent paid in cash.
Understanding Personal Guarantees on Commercial Mortgages
A personal guarantee pledges the private assets of an individual borrower to secure a commercial mortgage.
Deed in Lieu in Commercial Real Estate
In real estate, a deed in lieu, also known as a deed in lieu of foreclosure, is a potential alternative to a foreclosure or a short sale. It generally involves handing a lender the deed to a property in exchange or being released from all related debt obligations. For commercial real estate borrowers who have defaulted on their loans, a deed in lieu of foreclosure has several advantages to foreclosures and short sales, but they aren’t a good option in every situation.
Conditional Use Permits in Commercial Real Estate
A conditional use permit (CUP) allows a landowner to use their land in a way not permitted by ordinary zoning regulations. They can address nearly any type of non-conforming use, from building height and density to setbacks and myriad other specific commercial zoning issues.
Commercial Zoning in Commercial Real Estate
Zoning is the process of segmenting land into zones, each of which permits and prohibits specific land uses. Zoning also regulates elements like the height, density, and design of buildings in certain areas. Understanding zoning as it relates to commercial property is essential for commercial real estate investors and developers, as failing to abide by zoning regulations can be expensive, time consuming, and potentially disastrous.
Internal Rate Of Return (IRR) Calculator & Usage
An internal rate of return (IRR) is a calculation investors use to determine the likely rate of growth of capital (as it relates to both time and yield) for a particular commercial real estate investment opportunity.
Tenancy in Common (TIC) in Commercial Real Estate
Tenancy in common (TIC) is a type of commercial real estate ownership structure in which more than one party owns a specific property. Tenancy in common can make it easier for commercial real estate borrowers to get financing for a property, but can cause a variety of legal and practical complications if property owners are not careful.
Mini Perm Loans in Commercial Real Estate
Mini perm loans are generally used to finance an income-generating commercial property that has recently been built, but does not yet have the income to qualify for permanent financing. A variety of property types qualify for mini perm loans, including multifamily apartments, retail, office, and industrial properties. Mini perm loans can technically be classified as bridge loans, but they typically offer somewhat lower interest rates and generally have substantially longer terms.
BPS: Basis Points In Commercial Mortgages
Basis points are used to measure many financial instruments, including the fees, spreads and rates in commercial real estate finance.
Value-Add Commercial Properties
Value-add refers to the purchase of a building for the purpose of adding value. Value-add may come from lowering operational expenses and increasing revenue.
Cash on Cash Returns For Commercial Real Estate Investments
A cash on cash return calculation determines the amount of annual income an investor earns on a piece of real estate when compared to the amount of cash invested.
The Importance of Debt Yield in Commercial Property Loans
Debt yield is a measure of risk for commercial mortgage lenders. It takes into account the net operating income of a commercial property to determine how quickly the lender could recoup funds in the event of default.
Capitalization Rates (Cap Rates) in Commercial Real Estate
The Capitalization rate, or "Cap Rate" is calculated by dividing the net operating income of a property by its market value. This is the key tool appraisers use to determine the value of a commercial property and is the key metric behind the income capitalization approach to valuation.
Balloon Payments in Commercial Real Estate
Balloon mortgages are two-step financial products that see a borrower make installment-like payments for a certain number of periods before a much larger final payment becomes due to pay off the remainder of the loan. This last payment is called a balloon payment because of its large size compared to the smaller incremental payments.
Understanding Replacement Reserves
Replacement reserves is a budget line item used by commercial property underwriters to address periodic maintenance on systems that wear out faster than the building itself.
DSCR: Debt Service Coverage Ratio
Debt service coverage ratio or DSCR, is a comparison between net operating income and debt service on an annual basis and is generally one of the most important considerations when a commercial mortgage broker, lender or bank is underwriting a loan.
Loan Constant: Mortgage Constant
The loan constant, also known as the mortgage constant, is the calculation of the relationship between debt service and loan amount on a fixed rate commercial real estate loan. It is the percentage of the cash paid to service debt on an annual basis divided by the total loan amount.
Soft Step Down In Commercial Property Loans
A step down requires the payment of a set percentage of the outstanding amount of the loan. That percentage declines as the loan ages. While a typical step down might decline by 1% a year, for example 5 % in year one, 4 % in year two and 3 % in year three, a soft step down starts at a lower rate and declines less quickly. While a step down might have terms that equate to 5-4-3-2-1, a soft step down might be 3-2-2-1-1.
Interest-Only Loans in Commercial Real Estate
An interest-only loan is a type of loan in which the borrower only needs to pay the interest, not the principal, for a specific amount of time. This period will typically be laid out in the loan agreement. After the interest-only period of the loan ends, the loan will become a typical, amortizing loan, in which the borrower contributes to both the interest and the principal of the loan with each payment.
New Markets Tax Credits (NMTC) in Commercial Real Estate
The New Markets Tax Credit (NMTC) is a federal tax incentive program designed to encourage investment in low-income communities. Since congress started allocating credits in 2003, the program has issued approximately $25 billion in tax credits. Specialized investment vehicles called community development entities (CDEs) compete for NMTCs, which are allocated by the U.S. Department of the Treasury. Once a CDE has been allocated NMTCs, they can award investors the tax credits. In order to qualify for NMTCs, a CDE needs to invest or provide loans to a business located in one of approximately 31,000 qualified low-income census tracts.
Historic Tax Credits (HTC) in Commercial Real Estate
The Historic Tax Credit, or HTC program, is a 20% federal tax credit designed to encourage investors to fund the substantial rehabilitation of historic structures.
Effective Gross Income in Commercial Real Estate
Effective gross income (EGI), is all the income generated by a property, including rent, tenant reimbursements, and income from sources such as vending machines and laundry machines. It can also be defined as a property’s potential gross income, after expenses such as vacancies and credit costs have been subtracted. EGI is an efficient way to estimate a property’s value and cash flow
Commercial MLS in Commercial Real Estate
A multiple listing service, or MLS, is a software system used by real estate brokers in order to represent the sellers of properties, search for properties for buyers, and to establish commission rates for other brokers who may help a broker sell a property. There are approximately 900 MLS services in the United States, most of which are intended for residential property brokers in specific local areas. However, there are only a few commercial MLS providers that stand out, including LoopNet, CoStar, CREXi, Brevitas, and ApartmentBuildings.com.
Tenant Reimbursements in Commercial Real Estate
Tenant reimbursements, also known as tenant recoveries, are expenses which are paid back to a landlord by a tenant. Common examples of tenant reimbursements include property taxes, property insurance, maintenance and repair costs, and other operational expenses.
Refinancing Commercial Real Estate Loans
Refinancing is a key part of your commercial property investment strategy, particularly when interest rates are fluctuating or if you have a partially amortizing loan.
Commercial Property Management Fees in Commercial Real Estate
A typical commercial property management fee is anywhere between 4-12% of the rent for a commercial property, though this can vary greatly upon several factors, including the location, size and condition of the property, the amount, type, and quality of tenants, the specific services that the company is expected to perform, and the average property management rates for that area.
Commercial Equity Loans: The Basics
If you need capital to make repairs or renovations to your commercial property, or you’d like additional funds to purchase a new investment property, you may want to take out a commercial equity loan. Commercial equity loans allow you to tap into the equity you’ve built up in a property in order to get cash. These loans are typically offered by banks, but can be offered by private lenders. Commercial equity financing is also ideal for business owners that need additional funds to pay bills or expand their business.
Lease Renewal in Commercial Real Estate
Commercial leases can last as little as a few months, or as long as 20 years or more. In contrast, multifamily apartment leases are typically 12 months, with some leases ranging as long as 24 months. However, before a lease is up, a landlord has the option of allowing a tenant to renew their lease. Whether they want a tenant to renew is up to several factors, including the tenants behavior, as well as individual factors involving the property.
Securitization in Commercial Real Estate
Securitization is the process in which commercial or residential real estate loans are pooled together, packaged into a financial product, and sold to investors on the secondary market. Not all types of commercial real estate loans are securitized, but many are.
Debt Coverage Ratio in Commercial Real Estate
Debt Coverage Ratio (DCR), is a measurement of a property’s net operating income divided by its debt service. A property’s Debt Coverage Ratio, which is also known as its Debt Service Coverage Ratio (DSCR), is one of the most important eligibility factors for Commercial Real Estate Loans Keep in mind that net operating income can be calculated by subtracting a property’s gross revenue by its operating expenses. DCR/DSCR can also be applied to an entire company, as well as a single property, which is more relevant in the case of owner-occupied commercial properties.
Earnest Money in Commercial Real Estate
Earnest money is a deposit made by a buyer to demonstrate their serious intent to purchase a commercial property. This money is usually held in escrow until the transaction is complete.
Commercial Equity Lines of Credit in Commercial Real Estate
Commercial equity lines of credit, also known as CELOCs, involve a commercial real estate owner being given a line of credit that allows them to borrower against the equity in their property. Commercial equity lines of credit can be used for a variety of purposes, including growing your business by hiring new employees, obtaining new inventory, financing property improvements, or even purchasing a new piece of real estate. CELOCs are much like the home equity lines of credit (HELOCs) found in residential real estate.
Subletting in Commercial Real Estate
A sublease, or sublet, occurs when a tenant assigns part or all of their lease to a new tenant. In general, most commercial leases permit subletting, but not all do. Many commercial landlords will charge a fee for subletting in order to compensate for the additional risks and hassles that may occur due to dealing with an additional tenant.
Loan Seasoning in Commercial Real Estate
In commercial real estate finance, seasoning refers to the amount of time that a borrower has held a specific loan. Therefore, a seasoned loan is a one that has been held for a certain period of time. Many types of loans, including HUD multifamily loans and Fannie Mae/Freddie Mac multifamily loans have specific loan seasoning rules, especially when it comes to refinancing. In addition, most commercial and multifamily lenders will not let you take out a commercial equity line of credit unless your loan has been seasoned for at least one year.
Carve-Out Guarantees in Commercial Real Estate Finance
The carve-out guarantee gives a lender the authority to require payment for a commercial real estate loan beyond the actual value of the property if foreclosure occurs.
Return on Investment in Commercial Real Estate
In commercial real estate, return on investment (also known as ROI), is a measurement of how much money an investor receives from an investment after all expenses have been deducted. The formula for ROI is ROI = (Investment Gain - Investment Cost)/Cost of Investment.
Investment Variables in Commercial Real Estate
When it comes to making a decision on whether to invest in a commercial property, there are a variety of variables that an investor can take into account. First and foremost, in many cases, is return on investment, which calculates the amount of money that a investor will make compared to the amount of money they’ve invested into the property, minus any expenses. Other variables include the safety of an investment property, a property’s development potential, the property’s location, and an individual investor’s financial instincts.
Appraisals in Commercial Real Estate
A commercial property appraiser conducts an appraisal, which provides a market value of a commercial real estate asset. This is essential when seeking financing and when purchasing a property.
Waterfall and Promote Structures in Commercial Real Estate
A waterfall and promote structure, also known as a waterfall model, is a method for distributing the profits from a real estate investment in an uneven way. Typically, the project's sponsor (the individual or group putting most of the work in to identify, acquire, and manage the property) will receive a disproportionate share of the profits, known as a promote, as long as the project hits certain profitability benchmarks.
RevPar: Revenue Per Available Room in Commercial Real Estate (+ Calculator)
RevPar, or revenue per available room, is a measure of a hotel's financial performance, which can be calculated by dividing a hotel's total room revenue by the amount of available rooms. Another easy way to calculate RevPar is to multiply a hotel property's ADR (average daily rate) by its occupancy rate.
Price Per Key in Commercial Real Estate
In hotel construction and acquisition, price per key is a metric that compares the amount of money spent on building or acquiring the hotel with the number of rooms, or keys, in the hotel.
Floor Plate in Commercial Real Estate
In commercial real estate, the floor plate is the amount of leasable square footage on an individual floor of a building.
Break-even Ratio in Commercial Real Estate
The break-even ratio for a property is the percentage of its gross operating income that the property needs to break even, i.e. for costs to equal expenses. Investors can use a property's break-even ratio to determine if it's a good investment; too high of a break-even ratio may be a red flag. Break-even ratio can be calculated using the formula below: Debt Service + Operating Expenses/Gross Operating Income = Break-even Ratio
Restrictive Covenants in Commercial Real Estate
Restrictive covenants are restrictions placed on the use of a property. In commercial real estate, restrictive covenants may be placed on a property by a lender, restricting the activity of the owner while a loan is being repaid, or, by an owner, restricting the activity of tenants. In addition, restrictive covenants can also be written into a property's deed, either for a certain number of years or indefinitely.
Power Centers in Commercial Real Estate
A power center is an outdoor shopping center with multiple big-box retailers, as well as an array of smaller retailers, restaurants, and other kinds of businesses. Power centers are typically located in suburban areas due to cost and space restrictions, but can sometimes be located in urban areas as well. Many power centers are set up as large strip centers, but also may contain several out-parcels, pieces of land intended for individual tenants, such as banks or fast-food chains.
Operating Expense Ratio in Commercial Real Estate
An operating expense ratio, or OER, sometimes simply known as an expense ratio, is a metric comparing a property's operating expenses to the amount of income it generates. To determine a property's operating expense ratio, you can use the formula below: Operating Expenses/Gross Operating Income = Operating Expense Ratio For example, a building with operating expenses of $40,000 a year that brings in $100,000 of gross income would have a 40% OER.
Clear Height in Commercial Real Estate
In industrial real estate, a property's clear height is the height to which product can safely be stored on racking. Clear height can also be defined as the height of a building from the floor to the bottom of the lowest hanging item on the ceiling (i.e. sprinklers, lights, etc.). In recent years, clear height has become much more important due to the increase in online retailers, many of whom are trying to increase warehouse efficiency in any way possible.
Amortization in Commercial Real Estate
Amortization is the process of spreading a loan into payments that consist of both principal and interest over a set timeline, called an amortization schedule.
Anchor Tenants in Commercial Real Estate
An anchor tenant is the largest or most prominent store in a retail commercial real estate development, intended to help draw customers into the area. In strip centers and power centers, anchor tenants are often big-box stores or grocery stores, while in shopping malls, they're more likely to be department stores.
Prepayment Penalties in Commercial Real Estate
In commercial real estate loans, a prepayment penalty is a fee charged to borrower if they attempt to repay their loan early. When a lender issues a loan, they typically want to lock in their profit for a certain amount of time, so the prepayment penalty is a way to compensate them for their financial loss if the loan is paid off early.
Equity Multiple in Commercial Real Estate
Use our calculator to find your equity multiple, comparing the cash an investor has put into an investment to the amount of cash the investment has generated over a specific period of time.
Discounted Cash Flow Analysis in Commercial Real Estate
Discounted Cash Flow Analysis, or DCF analysis, is a method used to determine the current value of a set of cash flows using a predetermined discount rate. In practice, DCF analysis is often used to compare the potential return from a commercial real estate investment to the estimated return from another investment, such as a stock, mutual fund, private equity investment, or another piece of commercial real estate.
Assumable Loans in Commercial Real Estate
In commercial real estate, an assumable loan is a loan that can be taken over by a buyer when the owner of the property sells. Determining whether or not a loan is assumable (and under what conditions it can be assumed by a new buyer) can be very important, since otherwise, an owner/investor could face significant prepayment penalties if they need to pay off the loan in order to sell the property.
Load Factor in Commercial Real Estate
A load factor, also known as a loss factor, is a metric that compares the amount of space a tenant has to pay for in a commercial lease, versus the amount of space they can actually use.
The 1% and 2% Rules in Commercial Real Estate
The 1% rule states that a property's monthly rent must be at least 1% of its purchase price in order for the owner to break even. The 2% rule states that a property's monthly rent needs to be at least 2% of its purchase price in order for the owner to make a sustainable profit.
Occupancy Rate in Commercial Real Estate
Occupancy rate is an important metric for temporary housing, and can be measured by dividing the number of occupied units by the number of available units.
Multifamily Property Classes in Commercial Real Estate
Much like office properties are classified by quality as either "A", "B", or "C" properties, multifamily properties such as apartments can also be classified this way. However, unlike office buildings, multifamily properties are often classified from "A" through "D."
ARV: After Repair Value in Commercial Real Estate
If you're an investor or developer interested in purchasing and rehabilitating distressed commercial property, after repair value, or ARV, is one metric you should know. The after repair value of a property is simply the property's market value after any repairs, renovations, or improvements have taken place.
CTL: Credit Tenant Leases in Commercial Real Estate
A credit tenant lease (CTL) is a form of commercial real estate financing in which a loan is given for a property with a long-term lease (usually 10+ years), typically held by a nationally recognized tenant with a high credit rating.
Parking Ratio in Commercial Real Estate
A parking ratio is a statistic that takes the number of available parking spaces in commercial property and divides it by the property's entire gross leasable area (GLA).
Expense Stops in Commercial Real Estate
In a full service gross lease, the tenant pays a base rental rate, and landlord is typically responsible for paying any additional expenses (such as CAM fees), except for those that go above a specific amount, called an expense stop. Any expenses that exceed the expense stop then become the responsibility of the tenant.
FAR: Floor Area Ratio in Commercial Real Estate
This metric, particularly important for developers, is the ratio of a building's size compared to the land, and many zoning commissions place limitations on how high a FAR can be for a project.
Breakeven Occupancy in Commercial Real Estate
Breakeven occupancy is the occupancy at which a commercial real estate property goes from having an operating deficit to an operating surplus. It can also be defined as the point at which effective gross income (EGI), equals operating expenditures (OpEx) and debt service. If a property is exactly at breakeven occupancy, it's DSCR will be exactly 1.00.
ADR: Average Daily Rate in Commercial Real Estate
Average Daily Rate, or ADR, is one of the most important metrics that hotels use in order to determine the income and profitability of a property. ADR can be determined by dividing the entire rental income for a day by the number of occupied rooms on a property. For example, if a hotel made $50,000 in one day, as a result of 100 rooms being rented, their ADR for that day would be $500.
LURA: Land Use Restrictive Agreements in Commercial Real Estate
In certain multifamily real estate projects, an owner/developer will give up some of their rights via a Land Use Restrictive Agreement, or LURA, in order to receive tax credits in the future. The LURA will specifically document the restrictions placed upon the property, and typically help guarantee that the project will receive a specific number of LIHTC credits over a specific time period.
LIHTC: Low Income Housing Tax Credits in Commercial Real Estate
Low Income Housing Tax Credits, or LIHTC credits, are federal tax credits designed to encourage private businesses to invest in affordable housing. LIHTCs apply to multifamily apartment developments and eligible mixed-use commercial projects.
GRM: Gross Rent Multiplier in Commercial Real Estate
When it comes to determining whether a commercial or multifamily real estate project is a good investment, there are a variety of methods you can use-- and one of the most effective is to use a project's gross rent multiplier, or GRM, in order to help calculate the value of the property. A gross rent multiplier is defined as the number of years a property would take to pay for itself in gross rent--i.e. not taking into account insurance, property taxes, utilities, and other expenses.)
Sale Leaseback in Commercial Real Estate
In commercial real estate, a sale leaseback is a transaction in which one party sells a piece of real estate, and then leases that real estate back from the new owner, usually under a pre-arranged contract. Sale leasebacks can be especially helpful for business owners who are holding onto expensive retail or office property, but have cash flow problems or need equity to expand their business.
PSF: Per Square Foot in Commercial Real Estate
PSF, or per square foot, is the way that many commercial real estate rental and sale transactions are calculated. Most commercial leases are set at a specific PSF rate.
Percentage Leases in Commercial Real Estate
In commercial real estate, a percentage lease is a form of lease that requires a tenant to pay a percentage of their revenues in addition to a base rent, which will usually be calculated per square foot (PSF). Percentage lease arrangements are often open to significant negotiations before signing, since tenants and landlords may have different financial needs.
NPV: Net Present Value in Commercial Real Estate
Net present value, or NPV, is a financial metric that can help commercial real estate investors determine whether they're getting a certain return-- a 'target yield,' given the amount of their initial investment. Using the NPV equation, you can take a building's current net cash flows and your required rate of return, and determine what a building's value is to you, the investor, right now.
GLA: Gross Leasable Area in Commercial Real Estate
Gross leasable area (GLA) is the amount of space in a commercial building that can be rented by a tenant, including basements, mezzanines, or upper floors.
GSF: Gross Square Feet in Commercial Real Estate
Gross square feet, or GSF, is the entire square footage of a building. GSF typically includes areas such as the building core, maintenance and operations areas, stairwells, elevator shafts, equipment areas, attics, garages, balconies, excavated basement areas, mezzanines, corridors and walkways.
Class A, B, and C Office Buildings in Commercial Real Estate
Explore the different office asset classes and how properties are classified into each category.
S&U: Sources and Uses in Commercial Real Estate
A S&U, or sources and uses statement, is a document that shows where the funding for a commercial real estate project is coming from-- and how that capital is used. For S&U statements, the combined sources of funds needs to exactly match the combined uses of funds.
TTM: Trailing Twelve Months in Commercial Real Estate
TTM, or trailing twelve months, is measurement of a project's financial data for the last 12 months. TTM figures do not always represent the last fiscal year, though they might-- it is simply a snapshot of the last 12 months of financial activity. Taking a look at an existing commercial real estate project's TTM, as well as its rent roll, can be some of the best ways to determine the property's potential profitability.
T3: Trailing Three Months in Commercial Real Estate
T3, or trailing three months, is measurement of a commercial real estate project's finances for the last 3 months. T3 can be a great tool for investors, since it can help look at a project's most recent profitability, especially if rents or occupancy numbers have recently changed.
RR: Rent Rolls in Commercial Real Estate
A rent roll is a list of a property’s current tenants and how much they pay in rent. In practice, a rent roll is perhaps the best way to determine the true income of an existing commercial property.
R&M: Repairs and Maintenance in Commercial Real Estate
R&M, or repairs and maintenance, refers to work done on a commercial property that is designed simply to maintain the property’s current condition. This includes work done to prevent the further deterioration of building component or system or to replace a building component at the end of its useful life.
LTPP: Loan To Purchase Price in Commercial Real Estate
LTPP, or loan to purchase price, is a metric that compares the size of the loan to the purchase price of the property. It's similar to loan to value (LTV) ratio, but slightly different, since the purchase price and the value of a property can often be different. However, much like LTV, LTPP is also a good measure of leverage-- the higher the LTTP, the more leverage the borrower/buyer is using.
GPR: Gross Potential Rent in Commercial Real Estate
GPR, or gross potential rent, is the maximum amount of rent money an owner or investor can expect to make from a property during a specific time period. Gross potential rent assumes 100% occupancy, so it can be calculated by taking by adding together the market rent of every unit in a project.
FNMA: Fannie Mae Mortgage Association in Commercial Real Estate
FNMA, or Fannie Mae Mortgage Association, is a U.S. government sponsored enterprise that focuses on expanding housing opportunities across the United States. To do so, it purchases residential mortgages from lenders and securitizes, or pools them, into mortgage-backed securities. While Fannie Mae does not offer direct commercial real estate loans, investors can rent a certain amount of commercial space if they use an FNMA loan to purchase a multifamily property.
BPO/BOV: Broker Price Opinions in Commercial Real Estate
A BPO, or broker price opinion, also known as a BOV, or broker opinion of value, is an estimate provided by a real estate broker to help a potential investor get a better idea of how much they should bid for a property. A BPO/BOV is not held to the same standard as an appraisal, but it is typically much faster and much less expensive.
Step-Down Prepayment Penalties on Commercial Property Loans
It is called a step-down penalty because the amount gets smaller the longer the loan is in place. For example, a typical step-down might be 5% of the outstanding balance in the first year, 4% in the second year, 3% in the third year, and so on.
Due Diligence in Commercial Real Estate
Due Diligence refers to the practice of investigating or auditing a prospective investment in order to confirm facts. The audit includes analyzing different aspects of the investment like reviewing financial records, going over all legal documentation, etc. Due diligence is effectively the care any reasonable party should take before entering into any legal agreement or financial transaction
Compound Interest in Commercial Real Estate
Compound Interest is when interest is added to the principal amount after each period, and the next recurring interest calculation includes the principal along with the accumulated interest — making a sum grow exponentially.
U.S. Treasury Yields and Commercial Mortgage Rates
Commercial mortgage rates are influenced by the U.S. Treasury yields, where lower treasury yields lead to lower mortgage rates. This results in larger homes at a more affordable price and ultimately, in economic growth. However, a rise in the U.S. Treasury yields means the mortgage rates will also increase in order to compensate for the high risk.
Recourse Debt Versus Non-Recourse Debt in Commercial Real Estate
Recourse debt, also referred to as a recourse loan refers to a debt where the lender is able to claim the borrower’s assets if he or she fails to pay back the debt to its full amount. Unlike recourse debt, with non-recourse loans the lender is only allowed to collect the collateral but has no right to go after the borrower’s other personal assets.
Preferred Equity Investments in Commercial Real Estate
In a preferred equity investment, the investor is considered an equity partner and therefore benefits from a fixed rate of return.
Mezzanine Financing in commercial real estate authorizes a lender to convert a debt into equity in the event that a borrower defaults. For example, if the borrower fails to pay the debt in a timely manner, the lender has the right to take action by taking a portion of the investment property and then selling it to pay off that debt.
APR: Annual Percentage Rate in Relation to Commercial Real Estate
The Annual percentage rate or "APR" is the true interest rate that must be paid for a loan over the course of a year. Used to get a much better idea of the actual cost of a loan, APR is taken as the "true" interest rate because it accounts for all charges the borrower is responsible for
What is a Commercial Mortgage Loan?
A commercial mortgage loan is a commercial real estate loan that is secured by commercial property. A commercial real estate loan is an agreement in which the proceeds from the contract are used to buy, upgrade or rehabilitate a commercial property.
Modified Gross Leases in Commercial Real Estate
The modified gross lease, also sometimes referred to as the modified net lease, is a combination of the gross lease and the net lease. The operating expenses are both the landlord and tenant's responsibility. A modified gross lease falls in between the spectrum of a net lease (where the tenant is responsible for the operating expenses) and a gross lease (where the landlord is responsible for the operating expense).
Interest Rate Caps in Commercial Property Loans
An interest rate cap is used to limit the risk on a floating rate commercial property loan. A floating rate property loan has a variable interest rate, borrowers usually opt for this type of loan during periods of low-interest rates, because if the interest rate decreases further than the borrower benefits. A floating interest rate can also increase and that may be a huge financial risk if it increases rapidly or by too much. For this reason, borrowers try to cap the amount by which interest on the loan increases.
Earnouts in Commercial Real Estate Loans
An earn out is an agreement by the lender to increase the loan amount at the advent of a certain event. Earn outs are structured such that the additional money can be handled by the operating performance of the property. For example, more money can be released in the form of an earn out if the property has gone through renovations, has upgraded its tenant’s minimum income criteria or increased its tenant occupancy.
Holdbacks in Relation to Commercial Property Loans
A holdback is a clause in the commercial property loan that seeks to put aside a certain portion of the loan until an objective has been accomplished. Holdbacks account for any issue that has not been resolved before closing the contract and can be solved soon after. The holdback is held in the lender’s escrow account.
OpEx: Operational Expenditures in Commercial Real Estate
Operating expenditures are ongoing costs incurred in the operation and maintenance of a commercial property. Unlike CapEx, OpEx is fully tax-deductible in the year they are incurred.
CAM Fees in Commercial Real Estate
Common Area Maintenance or "CAM" fees are charges incurred in a commercial lease. CAM is paid by a tenant to their landlord. CAM is charged on top of the basic rent and caters for maintenance expenses incurred for work on the common area of a property. For example, in an office park, the tenants will pay CAM for the gardening on the office park.
CapEx: Capital Expenditure in Commercial Real Estate
Capital expenditure or "CapEx" are the funds used to acquire, upgrade or repair the property. It also includes the acquisition of equipment for said property. An expenditure is considered a CapEx if it is a new purchase or extends the life of the property. For example, fixing the roof, installing a furnace or painting the building.
Fixed Interest Rates and Variable Interest Rates in Commercial Real Estate
Every loan agreement comes standard with a form of interest that must be paid. Interest rates can be negotiable but usually appear in one of two forms: Variable or Fixed. A Variable Interest Rate loan has an interest rate on the outstanding balance that rises or falls based on the current status of the market interest rate. On the other hand, a Fixed Interest Rate loan has an interest rate that remains constant for the duration of the agreed loan term.
Loan Origination Fees in Commercial Real Estate
An origination fee when referring to a loan is the sum of money charged by a lender upon entering a loan agreement for the cost of processing the loan.
Loan Guarantee Fees in Commercial Real Estate
Loan guarantee fees are the fees charged to lenders for services like bundling, selling, and reporting mortgage-backed securities (MBS) to applicable investors. The fee is charged to protect against losses due to credit related issues in the mortgage portfolio.
Debenture in Commercial Real Estate
A debenture is a type of bond or rather a loan certificate given by a company that is unsecured and is supported by credit rather than collateral or physical assets. Debentures rely solely on the creditworthiness of the issuer. Like other bonds, debentures are noted in an indenture.
NOFA: Notice of Funding Availability in Commercial Real Estate
NOFA or Notice of Funding Availability is a statement issued by the GRRHP (under the USDA) in the Federal Register. The statement will contain information on the amount of funding to develop homes available for each area along with the period for which the funds will be available for.
O&M: Operating and Maintenance Expenses in Commercial Real Estate
O&M refers to operating and maintenance expenses; such as property and liability insurance premiums, utility installation charges and deposits, maintenance equipment, purchase of office equipment and furniture, congregate items, advertising expenses, management fees, etc.
FHLB: Federal Home Loan Banks in Commercial Real Estate
An FHLB (sometimes referred to as an FHLBank) or Federal Home Loan Bank is a region based bank that is part of a federally backed group of banks who provide housing finance and community investment loans. There are 11 FHLBs in total that provide reliable liquidity to financial institutions that are members of the program in order to support community investment and housing finance in the country.
GRRHP: Guaranteed Rural Rental Housing Program in Commercial Real Estate
The GRRHP or Guaranteed Rural Rental Housing Program is a federal government initiative which backs loans made by private lenders to developers of rural homes. The GRRHP program enables lenders to offer permanent loan option for the construction, acquisition or rehabilitation of rural multifamily properties through the United States Department of Agriculture’s (USDA) RD 538 program.
CFR: Code of Federal Regulations in Commercial Real Estate
CFR stands for Code of Federal Regulations. The CFR is the codification of the general andpermanent rules and regulations published in the Federal Register by the executive departments and agencies of the federal government of the United States.
HUD in Relation to Commercial Real Estate?
HUD is the term used to describe The United States Housing and Urban DevelopmentDepartment, which is the federal department tasked with creating decent housing for citizens. The government agency was founded in 1965 to support community development and home ownership.
AMI: Area Median Income in Commercial Real Estate
AMI stands for Area Median Income and is a statistic published by HUD. It is the household income of the median (middle) household in an area. HUD releases the AMI for areas across the USA every year. AMI is used as a measure to determine who qualifies for its federal housing programs.
Defining Yield Maintenance In Commercial Mortgages
Yield maintenance is a prepayment penalty on an existing commercial mortgage. It acts as a guarantee for the commercial property lender who made the original commercial mortgage, anticipating a set return over the full term of the loan. Unlike other prepayment penalties, yield maintenance covers the entire cost of the original lending agreement, compensating the lender fully for the prepayment of the borrowed funds.