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Commercial Real Estate Glossary

Content tagged with: Commercial Real Estate Loans

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Jun 12, 2019

Built to Suit in Commercial Real Estate

In a built to suit lease, a developer builds a property specifically for the use of one tenant. Generally, a tenant will locate a developer who is willing to purchase or ground lease land (or already owns land), and is willing to engage in a built-to-suit transaction.

Jun 10, 2019

Blend and Extend Amendments in Commercial Real Estate

In commercial leasing, a blend and extend amendment is allows a tenant to extend their lease and negotiate a new rate, merging, or “blending” the new and old rents. During periods of particularly high vacancy, commercial landlords will often offer agree to a blend and extend amendment that lowers a tenant’s rent, in order to keep their property occupied for an extended period of time.

Jun 9, 2019

Real Estate Debt Funds in Commercial Real Estate

For commercial real estate borrowers, debt funds often offer loans that banks can’t-- or won’t offer, including commercial construction loans, bridge loans/lease-up financing, and certain property rehabilitation and redevelopment loans. According to the Mortgage Bankers Association (MBA), debt funds originated nearly $70 in billion commercial real estate loans in 2018, around 10% of all CRE loans originated in that year.

Jun 9, 2019

Dark Shell in Commercial Real Estate

A dark shell refers to a commercial property that is leased to a tenant without interior improvements, such as heating, lighting, interior walls, plumbing, or air conditioning. A dark shell is also sometimes referred to as a cold dark shell, a cold shell, a grey shell, or a base shell.

Jun 8, 2019

Equity Kicker in Commercial Real Estate

If a commercial real estate borrower seeks out a mezzanine loan, but does not want to pay an extremely high interest rate, the lender may agree to reduce the interest rate in exchange for a piece of equity in the project, referred to as an equity kicker.

Jun 7, 2019

Intercreditor Agreement in Commercial Real Estate

In commercial real estate, an intercreditor agreement is an agreement between two lenders that stipulates the rights and responsibilities of each party. Intercreditor agreements are most commonly used when mezzanine debt is layered on top of a senior commercial real estate loan. Typically, the agreement creates a variety of safeguards that protect that senior lender’s interest in the property should the borrower default on their loan.

Jun 7, 2019

Adaptive Reuse in Commercial Real Estate

In commercial real estate, adaptive reuse occurs when an older building is adapted for a different use than it was originally designed for. Adaptive reuse can have a variety of advantages for commercial real estate investors and developers. Primarily, this comes in the form of significant savings; demolition and new building construction can be extremely expensive, and adaptive reuse can lead to substantially lower construction costs.

Jun 5, 2019

Recapture Clause in Commercial Real Estate

In commercial leasing, a recapture clause permits a landlord to terminate a lease early, and may also allow them to demand all or part of the remaining lease payments immediately. Recapture clauses can be triggered by a variety of events, but are are most often activated when a tenant closes their business and attempts to sublease the property.

Jun 5, 2019

Infill Development in Commercial Real Estate

In commercial real estate, infill is defined as the development of unused land in urban areas. This commonly takes the form of developing an empty lot of land between two buildings, but can also involve the demolition of older or underused properties. Supporters of infill development believe that it makes efficient use of existing land and reduces burdens on municipal services, due to the fact the area is already being served by water, power, and communications infrastructure.

Jun 2, 2019

Capital Stack in Commercial Real Estate

In commercial real estate finance, the capital stack is the legal organization of all the layers of debt that are used to purchase, build, or renovate a piece of real estate. The position of a piece of debt in a property’s capital stack determines what the order that lender will repaid in the case of a borrower default or bankruptcy.

May 9, 2019

UBP: Unpaid Principal Balance in Commercial Real Estate

In commercial real estate finance, unpaid principal balance, or UPB, is the amount of a loan’s principal balance that has not yet been paid back to a lender. To calculate the UPB, a borrower cannot simply subtract their current mortgage payments from the initial loan amount; since they have also been paying interest, they will have to add this into their calculations.

Apr 15, 2019

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.

Apr 15, 2019

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.

Apr 13, 2019

Understanding Personal Guarantees on Commercial Mortgages

A personal guarantee pledges the private assets of an individual borrower to secure a commercial mortgage.

Apr 10, 2019

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.

Apr 7, 2019

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.

Apr 5, 2019

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.

Apr 4, 2019

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.

Apr 2, 2019

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.

Mar 30, 2019

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.

Mar 29, 2019

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.

Mar 26, 2019

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.

Jan 9, 2019

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.

Jul 10, 2018

MSA: Metropolitan Statistical Area in Commercial Real Estate

Metropolitan Statistical Areas, or MSAs, are U.S. government designations for specific urban areas. MSAs are defined by the U.S. Office of Management and Budget (OMB). Currently, there are 383 Metropolitan Statistical Areas in the United States and 7 in Puerto Rico. An MSA generally groups several cities and counties that are closely interconnected, which makes it significantly easier for government agencies and businesses to compile statistics about a specific area

Apr 25, 2018

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.

Sep 13, 2017

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.

Aug 20, 2017

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.

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